IT : Where seller of wind mills was not related to assessee and purchase price shown by assessee in relation to such wind mills was genuine, Explanation 3 to section 43(1) could not be invoked
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[2013] 33 taxmann.com 188 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'A'
Navlakha Translines
v.
Income-tax Officer, Ward 3(2)*
SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER 
AND R. K. PANDA, ACCOUNTANT MEMBER
IT APPEAL NO. 78 (PN) OF 2009
[ASSESSMENT YEAR 2004-05]
SEPTEMBER  27, 2012 
Section 43(1), read with section 32, of the Income-tax Act, 1961 - Actual cost [Explanation (3)] - Assessment year 2004-05 - Assessee-company claimed to have purchased three wind mills for Rs. 6.70 crores from 'Vestas' and claimed depreciation thereof - Assessing Officer found that 'snowcem' purchased nine wind mills from 'vestas' between March 1999 to March 2002 and as some amount could not be paid by 'Snowcem', it surrendered three wind mills to 'vestas' and said three mills were purchased by assessee - Assessing Officer further found that 'snowcem' sold five wind mills at average rate of Rs. 41.9 lakhs per piece but assessee had shown cost of such mills at an average of Rs. 2.23 crores per piece - Accordingly Assessing Officer invoked Explanation 3 to section 43(1) and allowed depreciation on WDV of three windmills in hands of 'snowcem' - Whether five wind mills sold by 'snowcem' at an average rate of 41.9 lakhs were very old and were of capacity of 225 KW whereas three wind mills purchased by assessee from 'vestas' at average rate of Rs. 2.23 crores per wind mill were hardly 2 to 3 years old and were of capacity of 500 KW and, therefore, those five wind mill could not be compared with three mills purchased by assessee - Held, yes - Whether further, neither 'snowcem' or 'vestas' were related to each other nor assessee was related to 'snowcem' or 'vestas', no question of reduction of tax liability of assessee arose - Held, yes - Whether, therefore, actual cost paid by assessee at Rs. 6.70 crores to 'Vestas' being cost of 3 wind mills should be considered as cost price for allowing depreciation to assessee - Held, yes [Paras 16 & 22] [In favour of assessee]
FACTS
 
■  The assessee was in the business of transportation of gases and chemicals and generation and sale of wind power. It purchased three wind mills from vestas during previous year and claimed depreciation thereof.
■  The Assessing Officer noted that 'Snowcem' purchased 9 wind mills from 'Vestas' between March 1999 to March 2002 for a price of Rs. 10,22,51,113 which was to be paid till 31-3-2002. As some amount could not be paid by Snowcem it surrendered three wind mills to Vestas on 12-9-2003. He noted that Snowcem had actually sold 8 wind mills out of which five wind mills were sold for Rs. 2,09,50,000 only at an average rate of Rs. 41,90,000. As against this the assessee purchased 3 old wind mills for Rs. 6,69,85,000 at an average rate of Rs. 2,23,28,333. The assessee, therefore, evidently purchased the three old wind mills at the enhanced cost. The Assessing Officer, therefore, applied the provisions ofExplanation 3 to Section 43(1) and allowed depreciation on the WDV of the three windmills in the hands of Snowcem i.e., 26,50,000.
■  The Commissioner (Appeals) upheld the order of the Assessing Officer.
■  On second appeal:
HELD
 
■  Although the WDV of the wind mills in the books of Snowcem have been shown at Rs. 26,50,000 as on 31-3-2003, the assessee had argued before the lower authorities that Snowcem had returned the wind mills to Vestas at a cost of Rs. 10,23,50,575 being the amount outstanding as on 31-8-2003 and has offered short term capital gain on the difference between sale price and the WDV. This fact has not been disputed by the revenue. No doubt Snowcem had not paid any tax because of huge losses in its business, however, non payment of tax due to set off of the income against business loss by Snowcem cannot be the sole ground for refusing the depreciation in the hands of the assessee on the cost of the wind mills purchased from Vestas and for which payments have been made by cheque. The submission of the assessee before the lower authorities that neither Snowcem or Vestas are related to each other nor the assessee is related to Vestas or Snocem has not been proved to be false or untrue. The admission of the assessee that the 5 wind mills sold by Snowcem for a cost of Rs. 2,09,50,000 for which cost of one wind mill was Rs. 41,90,000 are very old and are of capacity of 225KW whereas the 3 wind mills purchased by the assessee from Vestas at Rs. 6.69 crores are hardly of 2 to 3 years old and are of the capacity of 500 KW and, therefore, those 5 wind mills cannot be compared with the 3 wind mills purchased by the assessee from Vestas Ltd. cannot be compared also could not be controverted by the revenue.
■  In the instant case, no other exercise has been done either by the Assessing Officer or Commissioner (Appeals) to determine the fair market value of the wind mills and they have simply adopted the WDV of the 3 wind mills in the hands of Snowcem as the cost of the 3 wind mills for the purpose of calculating depreciation. There is merit in the submission of the assessee that Explanation 3 to section 43(1) is applicable if the assessee claims enhanced cost as the actual cost and the Assessing Officer is able to show that the cost claimed by the assessee is more than the market value of the asset. Since the cost of a new wind mill has been claimed to be around Rs. 2.70 Crores during Financial year 2003-04, therefore, the market value of the second hand wind mills of 2 to 3 years old cannot be Rs. 9 to 10 lakhs as adopted by the Assessing Officer being the WDV of the wind mills in the hands of the Snowcem especially when the rate of depreciation is 80 per cent on wind mills. [Para 16]
■  Hence, the actual cost paid by the assessee at Rs. 6,69,85,000 to Vestas being cost of 3 wind mills should be considered as cost price for allowing the depreciation to the assessee. [Para 22]
CASE REVIEW
 
Jt. CIT v. Mahindra Sona Ltd. [2005] 96 ITD 303 (Mum.) (para 19); CIT v. Poulose & Mathen (P.) Ltd. [1999] 236 ITR 416/[1998] 101 Taxman 97 (Ker.) (para 20); CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510/4 Taxman 523 (Delhi) (para 21) distinguished; Chitra Publicity Co. (P.) Ltd. v. Asstt. CIT [2010] 127 TTJ 1 (Ahd.)(TM) and Western Maharashtra Flourine Chemical Industries v. Jt. CIT[2007] 7 SOT 572 (Mum.) (para 22) followed.
CASES REFERRED TO
 
Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540 (AP) (para 4), CIT v. Harveys Ltd. [1940] 8 ITR 307 (Mad.) (para 5), Ginners & Pressers (P.) Ltd. v. CIT [1978] 113 ITR 616 (Bom.) (para 5), CIT v. Sekar Offset Press [1995] 214 ITR 516/83 Taxman 436 (Mad.) (para 5),Nagammal Cotton Mills (P.) Ltd. v. CIT [2002] 258 ITR 390/[2003] 129 Taxman 915 (Mad.) (para 5), Western Maharastra Flourine Chemicals Industries v. Jt. CIT [2006] 7 SOT 572 (Mum.) (para 9.2), CIT v. Poulose & Mathen (P.) Ltd. [1999] 236 ITR 416/[1998] 101 Taxman 97 (Ker.)(para 9.4), Chitra Publicity Co. (P.) Ltd. v. Asstt. CIT [2010] 127 TTJ 1 (Ahd.)(TM) (para 9.4), Bombay Household & Industrial Plastics Mfg. (P.) Ltd. v. ITO [1982] 1 ITD 152 (Bom.) (para 9.5), Dy. CIT v. Metalising Equipment Co. Ltd. [1999] 54 TTJ (JP) 620 (para 9.5), Jt. CIT v.Mahindra Sona Ltd. [2005] 96 ITD 303 (Mum.) (para 10.1), CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510/4 Taxman 523 (Delhi) (para 10.1), CIT v. Mirza Ataullaha Baig [1993] 202 ITR 291/[1994] 76 Taxman 495 (Bom.) (para 10.2), Raj Kumar Jain v. Asstt. CIT [1994] 50 ITD 1 (All.) (TM) (para 10.2), Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373 (SC) (para 11) and Banyan & Berry v. CIT[1996] 222 ITR 831/84 Taxman 515 (Guj.) (para 11).
Sunil Pathak for the Appellant. Navrath and Mukesh Verma for the Respondent.
ORDER
 
R.K. Panda, Accountant Member - This appeal filed by the assessee is directed against the order dated 13-11-2008 of the CIT(A)-II, Pune relating to Assessment Year 2004-05.
2. Facts of the case, in brief, are that the assessee is in the business of Transportation of Gases and Chemicals and Generation and sale of Wind power. During the course of assessment proceedings the AO noted from the details furnished by the assessee that it has shown purchase of 3 wind mills from Vestas RRB India Ltd, Chennai (Vestas), the details of which are as under :
Bill No.Date No. of WindmillsAmount Rs.
1/2002-200430-09-20032 4,42,40,000/-
2/2003-200430-03-2004 12,27,45,000/-

Total3 6,69,85,000/-
From the above, the AO noted that one wind mill was purchased on 30-03-2004, i.e. just one day before the end of the accounting year. Besides he doubted the credibility of the above transactions. He noted that the bills have been issued by the Satara office of Vestas RRB India Ltd. Chennai, therefore, it is highly abnormal that Satara Branch of Vestas RRB India Ltd. had undertaken only two business transactions in the entire year, that too with the assessee only. Further according to him, it was not possible to install and commission the machinery, i.e. wind mill which was purchased by Bill No. 2 dated 30-03-2004 before the end of the previous year, i.e. 31-03-2004. In view of the above peculiar features the AO confronted the same to the assessee and asked him to explain as to why the depreciation claimed in respect of wind mills purchased on 30-03-2004 should not be disallowed as it was not possible to install and commission the wind mill in one days time.
3. It was submitted by the assessee that all the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. Chennai are old wind mills which were sold by Vestas RRB India Ltd. Chennai to M/s. Swowcem India Ltd. Mumbai and were commissioned on 30-03-2001 by the original owner M/s. Snowcem India Ltd., Mumbai. It was submitted that the wind mill was in working condition and generating power and was in use before 31-03-2004 and hence was eligible for depreciation as claimed.
4. However the AO noted that M/s. Snowcem purchased 9 windmills from Vestas between March 1999 to March 2002 for a price of Rs. 10,22,51,113/- which was to be paid till 31-03-2002. As some amount could not be paid by Snowcem it surrendered three windmills to Vestas as per the Memorandum of understanding drawn between them on 12-09-2003. In the sale bill issued to the assessee the resale of these three windmills was not mentioned. The AO further noted that Snowcem had already claimed depreciation in respect of the above three windmills and the W.D.V. of these windmills in the books of Snowcem was Rs. 26,50,000/-. Against this W.D.V. the assessee had paid Rs. 6,69,85,000/-. No tax has been paid by Snowcem on the Short Term Capital Gain on the sale of windmills. He noted that Snowcem had actually sold 8 windmills out of which five windmills were sold for Rs.2,09,50,000/- only at an average rate of Rs.41,90,000/-. As against this the assessee purchased 3 old windmills for Rs.6,69,85,000/- at an average rate of Rs.2,23,28,333/-. The assessee, therefore, evidently purchased the three old windmills at the enhanced cost. In the records of the Superintendent Engineer, Electricity Board, these 3 windmills are still in the name of Snowcem and were not transferred as claimed either to Vestas or to the assessee. The assessee had deliberately not purchased the windmills from Snowcem because that would have given a clue to the Income Tax authorities to find out the W.D.V. of these machineries in the books of snowcem. The indirect route taken by the assessee to show the surrender to Vestas, which in turn resold these windmills to the assessee at an enhanced cost in the disguise of selling new wind mills was intentional and was undertaken to reduce the liability of tax by claiming depreciation on the enhanced cost. The Assessing Officer therefore applied the provisions of Explanation 3 to Section 43(1) of the Income Tax Act, 1961 and allowed depreciation on the W.D.V. of the three windmills in the hands of M/s. Snowcem. The plea of the assessee that the transaction was genuine and that Explanation 3 to Section 43(1) can only be made applicable in case of transaction between related concerns and that the cost meant actual cost to the assessee as per bills was rejected by the AO. While doing so, the AO relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540. He further noted that for the purpose of application of Explanation 3 to Section 43(1) the following two conditions are required to be fulfilled :
(a)  The asset, prior to the date of acquisition by the assessee must have been used by another person for the purpose of his business.
(b)  The AO must be satisfied that the main purpose of the transfer of such assets directly or indirectly, to the assessee was reduction of a liability of income tax by claiming depreciation with reference to enhanced cost.
4.1 If above two conditions are satisfied, the AO has the power to determine the actual cost of transferred asset at such amount as he may, with the previous approval of the Joint CIT, determine having regard to all the circumstances of the case. In assessee's case the first condition is satisfied beyond doubt as the assets, i.e. the three windmills have been previously used by Snowcem for the purpose of its business. As far as the second condition is concerned, he observes that the same is also fulfilled in the case of the assessee for the following reasons :
(i)  In the bills issued by Vestas RRB India Ltd., Chennai nowhere it was mentioned that windmills were old windmills. Besides, assessee also did not inform on its own that these windmills were old windmills. It is only when the question of allowability of depreciation on the windmills purchased in this accounting year was raised that the assessee informed that those were old working windmills.
(ii)  The bills issued by Vestas RRB Ltd. Satara Division also show that in the entire year only two bills have been issued by that branch and that too, to this assessee only.
(iii)  All the correspondences with MSEB show that the windmills have been directly transferred from Snowcem to the assessee and the name of Vestas RRB Ltd. is not appearing anywhere. A copy of the letter of Snowcem dated 31-03-2004 addressed to M/s. Navlakha Translines also shows that actually these three windmills have been directly sold by Snowcem to M/s. Navlakhs Translined. Vestas RRB India Ltd. Chennai has been involved in this transaction so as to project that the windmills were purchased by the assessee directly from Vestas RRB India Ltd. Chennai as new windmills.
(iv)  It was noticed that Snowcem offered Rs. 8,76,21,900/- in its return of Income for A.Y. 2004-05, but not a single penny as tax has been paid by it because the net result of the computation of income was loss of Rs.75,54,375/-. Therefore, as a result of this routed transaction only revenue is at loss. M/s. Snowcem India Ltd. Mumbai has not paid any tax on the short term capital gain arising as a result of this transfer. Vestas has taken the windmills from Snowcem and given to the assessee. Lastly, the assessee by adopting above fraudulent route has been able to reduce its tax liability by claiming a heavy depreciation on these windmills.
(v)  The statement of income submitted by the assessee along with the return shows that no tax was paid by the assessee to hold that there was loss of revenue and Explanation 3 to Section 43(1) was squarely applicable.
5. The Assessing Officer also relied on the following judicial pronouncements :
I.  CIT v. Harveys Ltd. [1940] 8 ITR 307 (Mad.)
II.  Ginners & Pressers (P.) Ltd. v. CIT [1978] 113 ITR 616 (Bom.)
III.  CIT v. Sekhar Offset Press [1995] 214 ITR 516/83 Taxman 436 (Bom.)
IV.  Nagammal Cotton Mills (P.) Ltd. v. CIT [2002] 258 ITR 390/[2003] 129 Taxman 915 (Mad.)
6. Before CIT(A) it was submitted that the assessee is in the business of production of wind power since 1999 and purchased various windmills from time to time. Till 31st March 2004 the total amount of Windmills purchased were Rs.15.49 Crores including the cost of 3 windmills at Rs.6,69,85,000/- which is the subject matter of this appeal. Subsequently also till 31st March 2006, the total cost of purchases of windmills at Rs.23.65 Crores shows that this is the regular business of the assessee. During the year under consideration, the assessee has purchased three windmills from Vestas RRB India Ltd. for Rs.6,69,85,000/-. There is no dispute in respect of the acquisition of windmills and the payments made to Vestas RRB India Ltd. The invoices and the details of payments and other required details have been furnished to the AO from time to time. Even the AO has independently verified these details by his personal visits to the site and office of Vestas RRB India Ltd. It has also come to the knowledge of the assessee that the AO has also verified the details of these transactions by calling for information from Vestas RRB India Ltd. Snowcem India Ltd., MSEB, the Assessing Officer of Snowcem and the bankers of the assessee. From the Assessment order, it appears that the AO found everything in order except that the metering points in the books of MSEB were not transferred in the name of the assessee which was properly explained to the AO. It was accordingly claimed that there is no dispute about the genuineness of the transaction, about the invoices raised, the payments made against the purchases of these 3 windmills, about the income received from these windmills and about the depreciation allowable u/s. 32 of the Act.
6.1 It was argued that the land on which these windmills are erected have been transferred in the name of the assessee by registered agreements. The income from these windmills have been offered for taxation, the details of which are as under :
A.Y.Gross IncomeNet Income offered for taxation
2004-0591,06,89591,06,895
2005-063,41,68,0303,40,94,300
2006-071,66,38,5311,66,38,531
TOTAL6,02,70,7125,98,39,726
6.2 Narrating the facts and provisions of Explanation 3 to Section 43(1) to the assessee's case it was stated that 8 windmills have been originally sold by Vestas RRB India Ltd. to Snowcem India Ltd. in the year 1999. Till March 2002 an amount of Rs. 10,22,51,113/- was due by Snowcem to Vestas, including interest, maintenance etc. Vestas settled the dues with Snowcem in which 3 windmills have been surrendered by Snowcem to Vestas on account of full and final settlement. Thereafter, these three windmills have been purchased by the assessee from Vestas RRB India Ltd. The amount paid to Vestas for purchase of these three windmills is only Rs.6,69,85,000/- as against Rs.10,22,51,113/- due from Snowcem India Ltd. The book value of these windmills in the books of Snowcem India Ltd. was less than Rs.79,00,000/-.
6.3 It was further submitted that the assessee purchased the said windmills from Vestas RRB India Ltd. for which regular invoices have been issued by Vestas in the name of the assessee. The total amount of the bills have actually been paid by the assessee to Vestas RRB India Ltd. through banking channels only. Vestas, it's Directors or officers of the Company are not related with the assessee in any way except this normal transaction of sale and purchase of the windmills. It was submitted that the AO failed to give any reason as to why a company like Vestas will associate with the assessee to route this transaction. The only intention of Vestas was to recover the dues from Snowcem India Ltd. It was submitted that the story narrated by the AO that this transaction is a colourable transaction is nothing but a figment of imagination, which is based on surmises. It was emphasized that this is a genuine and normal business transaction only and that the AO failed to prove that the amounts mentioned in the bills are fictitious and not the actual cost. According to the assessee the AO failed to understand that to apply the provisions of Explanation 3 to Section 43(1) the transactions should be bogus, sham and entered into with fraud, collision and inflates or deflates the values with ulterior motives. The AO has not given any reason as to why the two renowned companies, who are apparently strangers to the assessee and not related at all with each other will associate with the assessee for assessee's benefit. Therefore, this theory of the Assessing Officer was not justified.
6.4 In the alternate, it was argued that even if it is assumed that the provisions of Explanation 3 to Section 43(1) is applied to the facts of this case, then it is the duty of the AO to determine the Actual cost for the purpose of this section. The AO simply took the WDV in the books of Snowcem India Ltd for the purpose of allowing depreciation to the assessee. The AO ought to have considered the following facts for determining the actual cost :
(i)  The said windmills were not very old and before the assessee acquired the same, they were in use just for about 3 years.
(ii)  The cost of the same capacity new windmills was about Rs. 2.70 Crore each in 2003-04.
(iii)  The net income generated by these three windmills till 31st March 2006 is about Rs. 6 Crore in 2.5 years. In the assessee's opinion no businessman in the world will sell his fixed assets at Rs. 26.50 lakhs where the generation of income from the said assets will be in the tune of Rs. 2 Crore annually.
(iv)  The assessee was in this business since 1999 and he could anticipate the rate of return on investment and purchased the said windmills at utmost competitive price.
6.5 It was further pointed out that another reason stated by the AO for application of this Explanation 3 to Section 43(1) is that according to him this transaction was entered into with the motive of reduction of income-tax and this idea he has derived from the fact that no tax has been paid by Snowcem India Ltd. and the assessee himself. It was argued that the AO failed to appreciate that when a transaction is otherwise valid in law and results in reduction of tax to an assessee, the same cannot be brushed aside on the ground that the underlying motive of entering into the transaction by the assessee was to reduce its tax liability. According to the assessee there is no material or evidence to show that the intention of parties to the transactions were different from what has been incorporated in the actual sale/purchase transactions. According to the assessee, the company Snowcem India Ltd. is not related with the assessee in any way but according to the information given by the AO the said company has in its return of income disclosed Rs.8,76,21,900/- by way of short term capital gains on transfer of these 3 windmills. The question to be asked here is the tax liability and not the actual payment of tax. The tax liability is a legal fiction and payment of tax is a fiscal fact. The Assessing Officer relied on some of the case laws in his assessment order, which in assessee's opinion supports the case of the assessee.
6.6 Relying on various case laws it was argued that the claim of the assessee regarding depreciation on windmills be allowed. It was further argued that the various decisions relied on by the AO are distinguishable and not applicable to the facts of the present case.
7. However, the CIT(A) was not convinced with the arguments advanced by the assessee and upheld the order of the AO by holding as under :
"3. I have gone through the facts of the case and perused the material on record. The issue at stake is the application of Explanation 3 to section 43(1) of the Income Tax Act to the transaction entered into by the appellant purchasing three windmills for Rs.6,69,85,000/- against the W.D.V. of Rs. 26,50,000/- only. The determination of actual cost of depreciable assets is required to be made in accordance with section 43(1) of the Income Tax Act which defines the expression '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. The definition of 'actual cost' in section 43(1) is required to be applied for purposes of section 28 to 41 of the Income Tax Act as well as section 43, unless the context otherwise requires. If, therefore, the context 'otherwise requires', the determination of actual cost must be so arrived at as to ensure that it is appropriate in the context of the facts and circumstances of the respective cases.
3.1 Explanation 3 to section 43(1) expressly provides that in cases where, before the date of acquisition by the assessee, that assets were, at any time, used by another 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 previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case. Therefore, under this section the cost of assets taken over from the previous owner can be disregarded by the Assessing Officer in cases where the asset had been overvalued by the previous owner seller with a view to entitling the buyer/successor to claim depreciation on the enhanced cost thereof.
3.2 The Assessing Officer found as a fact that the three windmills purchased by the assessee were old being used by Snowcem and the W.D.V. in the hands of Snowcem was Rs.26,50,000/- against which the assessee had paid Rs.6,69,85,000/-. The Assessing Officer also noted that Snowcem had sold 5 windmills @ Rs.41,90,000/- each totalling Rs.2,09,50,000/- to other parties while the three windmills sold to the appellant were @ Rs.2,23,28,333/- totalling Rs.6,69,85,000/-. All the three windmills were still in the name of Snowcem in the records of Maharastra State Electricity Board. Further, the purchase of these windmills were not directly made from Snowcem which could have given a clue about the W.D.V. in the hand of Snowcem but was routed through Vestas, the manufacturer of the windmills, and in the bills issued by Vestas it was not written that the windmills were being resold. According to the Assessing Officer, the indirect route was resorted to for reducing the liability of income tax by claiming higher depreciation as no tax was paid by either Snowcem as it already had huge carry forward losses against which the capital gains arising from the sale of three wind mills was set off or by the appellant for the depreciation was claimed at enhanced cost of Rs. 6,69,85,000/- which wiped out the income shown.
3.3 In so far as the Assessing Officer's contention that the windmills were still in the name of Snowcem in the records of Maharastra State Electricity Board, the Assessing Officer in my considered opinion cannot have any grievance in this regard. It is not in dispute that the entire income from the sale of electricity was shown in the hands of the appellant and not Snowcem. The Assessing Officer has assessed such income in the hands of the appellant. Further, depreciation was ultimately allowed to the appellant by the Assessing Officer at a lower figure than claimed. Had the appellant not been owner of the windmills the Assessing Officer could not have assessed the income shown from those windmills and also would not have allowed the depreciation even at the reduced cost. The contention of the Assessing Officer that the windmills were still in the name of M/s. Snowcem in the records of M.S.E.B. is, therefore, treated as only an observation without there being any effect on the assessment of the appellant.
3.4 Further, the contention of the Assessing Officer that no short term capital gains were shown by Snowcem in the return is also not correct. From the records of Snowcem, it is found that the Snowcem has shown short term capital gains of Rs.8,76,21,900/- in its return which included short term capital gains on the sale of the impugned three windmills to the appellant. However, in view of the depreciation on other windmills and carry forward of losses etc., claimed by Snowcem such short term capital gains were set off and Snowcem had returned a loss return. Be that it may, it cannot be held that no short term capital gain was shown by Snowcem, as Snowcem did show short term capital gains but it is another matter that because of depreciation and other losses such gains were set off.
3.5 The Assessing Officer's contention that no tax was paid by both the parties is not relevant on the facts of the case. The computation of income in the case of Snowcem has already been discussed above. In the case of the appellant if the purchase value is taken at Rs.6,69,85,000/- no tax would be payable because there is no dispute that depreciation claimed on the purchase value of Rs. 6,69,85,000/- is required to be allowed for the assessee is undoubtedly the constructive owner of the windmills, these windmills were used for the purpose of business of the appellant and the entire receipts/income from windmills was shown and assessed in the hands of the appellant.
3.6 The issue, which is, therefore, required to be decided is as to what is the actual cost of the three windmills in the hands of the appellant and further as to why a circuitous route was resorted to for making the purchase from Snowcem when the bills were being issued by Vestas the manufacturer of the windmills. Regarding the route taken by the appellant to purchase the windmills, it was stated by the appellant that Vestas had sold these windmills to Snowcem and that Snowcem was not able to make the payments to Vestas. The appellant was approached for purchase of the windmills and a tripartite agreement was entered wherein the windmills purchased in the earlier years by Snowcem were surrendered to Vestas and, therefore, Vestas issued Bill Nos. 1 & 2 to the appellant. It was stated that the entire amount of Rs.6,69,85,000/- was paid by cheque to M/s. Vestas only.
3.7 Irrespective of the fact that the payment for purchase of these windmills was made to Vestas, this deal was not available in the assessment records as claimed by the appellant. Further, Snowcem had purchased 8 windmills from Vestas against which till March, 2002 an amount of Rs.10,22,51,113/- was due including interest and maintenance, etc. However, it is not correct to state that the amount paid to Vestas for purchase of 3 windmills was only Rs.6,69,85,000/- as against Rs.10,22,51,113/- for the purchase price paid by Snowcem from Vestas originally was never produced either before the Assessing Officer or in the appellate proceedings. In any case the amount of Rs.10,22,51,113/- was due on overall purchase of 8 windmills and included interest and maintenance, etc. also and not with respect to these 3 windmills.
3.8 According to the appellant, the Assessing Officer has not established that the transaction was bogus, sham or entered into with the object otherwise than business expediency. It was further stated that no reasons were given by the Assessing Officer as to why Vestas or Snowcem should allow the appellant to reduce its tax liability and how those companies were benefitted otherwise than by recovery of the debt by Vestas from Snowcem. It was reiterated that there was no reduction of tax liability as the assessee had actually paid the total amount of purchase value on which depreciation had been claimed.
3.9 The Assessing Officer and the assessee relied upon and distinguished the decision given by each other. It is seen that the facts of the cases relied upon by the assessee were entirely different from the facts of the case under consideration. It has been a well-settled view that the ratio of any decision must be understood in the background of that case. What is of essence in a decision is its ratio and not every observation found therein nor what legally follows from the various observations made in it. It is not a profitable task to extract a suitable sentence here and there from a judgment and to build upon it (vide Ambica Quarry Works v. State of Gujarat, AIR 1987 Supreme Court 1073). Reliance may also be placed on the decision in the case of CIT v. Sun Engineering Works P. Ltd. ,[1992) 198 ITR 297 (SC) (Page 320) wherein it was observed as under :
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision...".
Further, in State of Orissa & Ors. v. M.D. Illyas, (2006) 1 S.C.C. 275 the Supreme has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basic postulates. A finding of material facts, direct and inferential. An inferential finding of fact is the inference which the judge draws from the direct or perceptible facts: (ii) statement of the principle of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the individual effect of the above. In Municipal Corporation of Delhi v. Gurnam Kaur (1999) 1 C.C. 101 the Supreme Court has set out the tests of finding the principle which is binding.
In my considered view, the principles enunciated in the cited cases do not render any help to the appellant in the facts and circumstances of the present case because the appellant's case is held to be distinguishable on facts.
3.10 The appellant has not produced any revaluation of the three windmills done by any approved valuer either before the Assessing Officer or in the appellate proceedings. The Assessing Officer has also not got the valuation of machinery done by any valuer. The correct figure of value at which the depreciable asset could be brought by the appellant from any other previous owner, therefore, is not precisely known. The question whether the object of the transfer was only to claim higher depreciation in the hands of the buyer and thereby take undue advantage to avoid legitimate tax payable is required to be examined with regard to the value of the asset regardless of who the previous owner was. The language of Explanation 3 to section 43(1) requires that the Assessing Officer must be satisfied with the previous approval of the Jt. C.I.T. that the objective of the transfer of the asset was only to reduce the liability to Income Tax by claiming higher depreciation on the enhanced cost of the asset. The fact that the appellant had shown a huge amount of income from windmills is irrelevant as the valuation has to be decided primarily in the year of purchase.
3.11 In the case of CIT v. Poulose and Mathen Pvt. Ltd., (Ker.) reported in 236 ITR 416 it was held by the Kerala High Court that where the assessee took over the assets of partnership firm by revaluing them at a very high figure, the Assessing Officer was justified in invoking Explanation 3 to section 43(1) and fixing the actual cost accordingly. It was held that the prefixing of the word 'actual' to the word "cost" is obviously intended to make emphasis on the reality and genuineness thereof. The fixation of 'actual cost' arises only when the Assessing Officer is satisfied that the main purpose of the transfer of the assets which was 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 the Assessing Officer is so satisfied, he had wide discretion to fix the 'actual cost' having regard to all the circumstances of the case subject to the previous approval of the Dy. CIT. The conclusion of the Tribunal that the revaluation of the assets on the eve of the dissolution of the firm was made bonafide for adjustment of the mutual rights of the firm is not sustainable. This is not a case where there is 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 under s.43(6). Sec 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 s. 43(1) read with Explanations thereof affords a mechanism by which the actual cost is reduced 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 asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay income-tax, the 'actual cost' shall be determined by the Assessing Officer in the exercise of the power conferred on him as prescribed in Expln. 3 to s.43(1) no matter what the general law prescribes for determining the costs of the assets on dissolution of partnership firms and transfer of its assets. It is a settled position that the Court has power to disregard the corporate entity if it is used for tax evasion or two circumvent tax obligation. In this premise it cannot be said that the AO has acted unreasonably or arbitrarily in adopting Expln. 3 to s. 43(1) and fixing the 'actual cost' accordingly. The assessee is not entitled to claim depreciation on the assets taken over from the partnership firm at the revalued figure. Applying the decision in the case of CIT v. Meenakshi Mills reported in 63 ITR 609, it was held that the Income Tax authorities are entitled to pierce the veil of corporate entity and look at the legality of the transaction. It was held that the Assessing Officer had not acted unreasonably or arbitrarily in adopting Explanation 3 to section 43(1) of the Act and fixing the actual cost accordingly.
3.12 As there is no decision of the jurisdictional High Court directly on this issue, the decision of the Kerala High Court is a binding precedent unless a contrary decision is given by any other competent High court. Reliance in this regard is placed on the decision of ACIT v. Aurangabad Holiday Resorts Pvt. Ltd., (ITAT, Pune 'A' Bench) reported in 111 TTJ 741. Relying upon the above discussion the grounds of appeal Nos. 1 and 2 are dismissed."
8. Aggrieved with such order of the CIT(A) the assessee is in appeal before us with the following grounds :
"1.  The learned CIT(A) erred in confirming the disallowance of depreciation of Rs.4,44,90,000/- on wind mills on the ground that the purchase of wind mills was made by the appellant from Snowcem India Ltd. in order to explain higher depreciation by inflating the cost and the provisions of explanation 3 to Section 43(1) were applicable to the facts of the case.
2.  The learned CIT(A) was not justified in holding that the transaction was arranged by Snowcem for sale of windmills to the assessee for the purposes of claiming higher depreciation for the assessee.
3.  The learned CIT(A) failed to appreciate that :
(a)   The appellant had purchased these windmills from Vestas RRB Ltd. and not from Snowcem India Ltd.
(b)  Because Snowcem had defaulted in making the payment of the purchase price to Vestas for these windmills, the ownership over these windmills had reverted to Vestas and being second hand assets, the assessee paid a lesser consideration than the actual market price for the new similar windmills and accordingly, the charge of the A.O. that the appellant had paid a higher purchase price for the windmills is not justified.
(c)  The other windmills sold by Snowcem were not comparable with the windmills purchased by the assessee in any manner and therefore, their sale price could not be compared with the price paid by the assessee for the windmills.
(d)  The fact that the assessee generated sufficient income from these windmills itself indicated that the price paid for the windmills by the assessee was not higher than their fair market value.
(e)  Snowcem or Vestas were not related to the assessee in any manner and the purchase transaction was at arm's length.
(f)  Explanation 3 to Section 43(1) was not applicable to the facts of the case.
(g)  Correspondingly, Snowcem had shown substantial profit on sale of these windmills and just because there was no tax liability in this year on that company, the transaction would not be considered as the one arranged for claiming higher depreciation for the assessee.
(h)  The case laws which are relied upon by him in support of his decision were not applicable to the facts of this case particularly on the ground that in those cases, the purchases were made by the assessee concerned from the related parties.
9. The learned counsel for the assessee reiterated the same submissions as made before the AO and the CIT(A) and further submitted that the business of the assessee is that of power production from wind mills. He submitted that the assessee had some wind mills and during this year the assessee purchased 3 wind mills from M/s. Vestas for a sum of Rs.6,69,85,000/- on which depreciation has been claimed as per law. He submitted that Vestas India Ltd. had earlier sold the wind mills to Snowcem India Ltd. Since Snowcem India Ltd. failed to pay the amount of Rs.10,23,50,575/- due to Vestas India Ltd. as on 31-08-2003 and since Vestas had initiated legal proceedings against Snowcem, therefore, snowcem returned the wind mills to Vestas India Ltd., who in turn sold the windmills to the assessee. He submitted that none of the 3 parties are related to each other. Snowcem India Ltd. had claimed depreciation @ 80% on the wind mills which is the rate applicable to the wind mills. He submitted that after Snowcem India Ltd returned the wind mills to Vestas India Ltd. for Rs. 10,23,50,575/- they offered short term capital gain on the difference between the sale price and the WDV. He submitted that Snowcem did not pay any tax because it had huge losses in its business. He submitted that the assessee company had paid an amount of Rs. 6,69,85,000/- by cheque to Vestas India Ltd. towards cost of the wind mills. Therefore, the cost must be considered as whatever price the assessee has paid.
9.1 Referring to Page 42 of the Paper Book he submitted that the MOU between Snowcem India Ltd. and Vestas India Ltd. for returning the wind mills was dated 12-09-2003. Referring to page 47 of the Paper Book he submitted that the Board of Directors of Snowcem India Ltd. had passed a resolution on 27-08-2003 for returning the 3 wind mills to Vestas India Ltd. Referring to Page Nos. 10 to 13 of the Paper Book he drew the attention of the Bench to the invoices raised by Vestas India Ltd. against the assessee towards the sale of the wind mills. Referring to Page Nos. 48 to 51 of the Paper Book he drew the attention of the Bench to the Power of Attorney issued by Snowcem India Ltd. in favour of the assessee to deal with the Electricity department, Government agencies, Sales tax department etc. The power of attorney also mentions the surrendering and return back of 3 wind mills each of 500 KW capacity located at Chalvedi Village, District, Satara to the suppliers. He submitted that during the year 2002 Vestas India Ltd. has sold these wind mills to Snowcem India Ltd. at Rs.7.95 Crores, i.e. roughly Rs.2.65 Crores per wind mill. However, the assessee purchased the second hand wind mills from Vestas India Ltd. at a cost of Rs. 2.23 Crores each. He submitted that cost of a new wind mill would have been Rs. 2.70 Crores during 2003-04 as against which the assessee has paid price of Rs.2.23 Crores approximately for a windmill. Therefore, the assessee was benefitted by paying a lesser price for the second hand wind mills which are 2 to 3 years old since the average life of a wind mill is about 20 years. Therefore, under the facts and circumstances of the case the price paid by the assessee for the second hand wind mills was most reasonable considering the market price for a new wind mill.
9.2 He submitted that it had been categorically stated before the lower authorities that assessee is not related to Vestas India Ltd. or Snowcem India Ltd. and therefore they had no interest in the saving of tax. Referring to the provisions of Explanation 3 to Section 43(1) he submitted that same is applicable if the purpose of transfer of an old asset to the assessee is the reduction of liability of Income Tax by claiming depreciation with reference to an enhanced cost. In that case the AO can determine the actual cost to the assessee having regard to the circumstances of the case. However, since the assessee and Snowcem India Ltd. or Vestas India Ltd. are not related to each other, therefore, it cannot be said that the transferor has already taken the benefit of higher depreciation and transferred the asset to a related party at a high price so as to get higher depreciation again in the hands of the related party. Further, the assessee is buying second hand wind mills from the manufacturer, i.e. Vestas India Ltd. There is no law that the fair market value of a second hand asset is the WDV in the books of the earlier user only. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Western Maharastra Flourine Chemical Industries v. Jt. CIT [2006] 7 SOT 572 he submitted that the Tribunal in the said decision has held that depreciation is allowable at an enhanced rate under the Income Tax Act and therefore WDV as per Income Tax Act cannot reflect the market value of a particular asset. Therefore, the WDV in the hands of Snowcem India Ltd. cannot be the fair market value of the wind mills. He submitted that if the AO wanted to invoke this explanation the burden was on him to show that the WDV is the fair market value.
9.3 As regards the allegation of the AO that Snowcem India Ltd. had sold the other 5 old wind mills for Rs.2,09,50,000/- for which the cost per wind mill was Rs.41,90,000/- and as against this the assessee has paid higher price, he submitted that all those wind mills were of 225 KW capacity whereas the 3 wind mills purchased by the assessee are of 500 KW capacity each. Further those 5 wind mills are comparatively much older whereas the 3 wind mills purchased by the assessee from Vestas India Ltd. are hardly 2 to 3 years old. Hence those 5 wind mills cannot be compared with that of the 3 wind mills purchased by the assessee from Vestas India Ltd.
9.4 So far as the various case decisions relied on by the AO he submitted that all those decisions are distinguishable and not applicable to the facts of the present case. In all those cases the transactions were between related parties whereas in the instant case no relationship exists between the assessee and Vestas India Ltd. or Snowcem India Ltd. He submitted that the income offered by the assessee has been taxed in the hands of the assessee. The AO has accepted the income of the wind mills. Further the whole order/tenor of the order passed by the CIT(A) is in favour of the assessee. However, he has basically relied on the decision of the Hon'ble Kerala High Court in the case of CIT v. Poulose & Mathen (P.) Ltd.[1999] 236 ITR 416/[1998] 101 Taxman 97. In that case, the assessee took over the assets of the firm in which it was a partner at a very high value. This valuation could not be justified by the assessee and being a related party to the transferor, explanation 3 of section 43(1) was applied. Accordingly, the depreciation on the enhanced value was disallowed. However, this case has no application to the facts of the present case. On the other hand, the assessee places reliance on Third Member decision in the case of Chitra Publicity Co. (P.) Ltd. v. Asstt. CIT[2010] 127 TTJ (Ahd.)(TM) 1 ITAT Ahmedabad wherein it has been held that the burden to prove the fair market value and that the assessee has paid a higher price is on the AO and if it is not discharged, explanation 3 to section 43(1) cannot be invoked. He submitted that in this case also, the AO has not discharged the burden cast on him and he had invoked explanation 3 of section 43(1) only on presumptions and surmises. Secondly, the AO holds that the earlier company, i.e. Snowcem has not paid tax on the short term capital gains u/s.50 on return of windmills to Vestas. He submitted that if Snowcem was in losses, the assessee was not concerned. Snowcem did show the income on return of windmills to Vestas u/s.50 but not paid taxes because of set off of losses. The assessee was not a gainer by the tax saving of Snowcem and hence this contention of the AO is irrelevant.
9.5 He submitted that explanation 3 to section 43(1) clearly states that the same is applicable if the assessee claims enhanced cost as the actual cost. This means that the AO must show that the cost claimed by the assessee is more than the market value of the asset. The stress is on the word 'enhanced'. In this case, the assessee has justified the cost by comparing it with the market price of a new windmill. The AO on the other hand, simply holds the WDV in the books of Snowcem as the market value. Hence, the AO has not shown that the assessee has claimed enhanced cost as the actual cost and secondly that the transaction is made to defraud the revenue. He submitted that enhanced cost means an inflated cost and in this case it is not so and hence explanation 3 of section 43(1) does not apply. He also relied upon the decision of Mumbai Bench of the Tribunal in the case of Bombay Household and Industrial Plastics Mfg. Co. (P.) Ltd. v. ITO [1982] 1 ITD 152 (Bom.) and the decision of the Jaipur Bench of the Tribunal in the case of Dy. CIT v. Metalising Equipment Co. Ltd. [1996] 54 TTJ (JP) 620 and the decisions in Western Maharashtra Flourine Chemical Industries (supra), Sekhar Offset Press (supra).
9.6 He accordingly submitted that the order of the CIT(A) should be set aside and the assessee should be allowed depreciation on the amount of Rs.6,69,85,000/- being the cost of the mind mills purchased by the assessee from Vestas.
10. The learned DR on the other hand heavily relied on the order of the CIT(A). He submitted that the assessee has acquired the wind mills in the month of September but paid the cost in the later months and therefore this was a tax planning. He submitted that the sales by Satara office of Vestas show that they have sold the wind mills during the year only to the assessee and there is no other sales. Further the MOU copy between Vestas and Snowcem placed at Page 42 to 46 of the Paper Book has not been signed by both the parties. Therefore, this indicates that this was a tax planning device. He submitted that mere production of some documentary evidence to show the contract at a certain price does not conclusively establish the correctness of the price paid and if the AO is of the opinion that the assessee has resorted to a device to avoid tax he can go beyond the contract and ascertain the actual cost of the asset for the purpose of allowing depreciation.
10.1 The learned DR also relied on a number of decisions. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Jt. CIT v.Mahindra Sona Ltd.[2005] 96 ITD 303 he submitted that where an asset was already in use in a business in the hands of one person and its WDV has been ascertained by the AO and that person transfers the asset to another person for a price exceeding its WDV, then it is open to the AO to reduce the sales price as actual cost to purchaser in purchasers assessment if he is satisfied that main purpose of transfer was reduction of liability to Income Tax by claiming depreciation with reference to enhanced cost. He also relied on the decision of Hon'ble Kerala High Court in the case of Poulose & Methen (P.) Ltd. (supra) and the decision of Hon'ble Delhi High Court in the case of CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510/4 Taxman 523.
10.2 The learned Authorised Representative in his rejoinder submitted that the bills of Vestas during this year were only for the sales effected to the assessee because Vestas, Satara Branch had sold the windmills for that area and they were closing that branch and thus these two windmills having been returned by Snowcem remained with them for sale. Thus the bills are not bogus and the purchase price is paid by the assessee by cheques. He submitted that if the assessee has paid the purchase consideration after September, then depreciation is still allowable in view of decision of the Hon'ble Bombay High Court in the case of CIT v. Mirza Ataullaha Baig [1993] 202 ITR 291/[1994] 76 Taxman 495 wherein it is held that depreciation is allowable on the cost of an asset which is outstanding at the end of the year if the asset is used for business. Hence, depreciation was correctly allowable to the assessee. He submitted that the AO himself has allowed depreciation on the windmills. The only dispute is regarding the actual cost to be adopted. Hence, if the AO himself has allowed the depreciation, that point cannot be agitated at this stage. Referring to the decision of the Tribunal in the case ofRaj Kumar Jain v. Asstt. CIT [1994] 50 ITD 1 (All.) (TM), he submitted that the Tribunal is not an investigating authority. He submitted that the MOU on page 42 of the Paper Book is referred to in the power of attorney on page 49 and hence its authenticity cannot be doubted just because the assessee has submitted the unsigned copy in the paper book. He submitted that this is not a case of tax planning but it is a legal arrangement to claim depreciation of wind mills. He submitted that the AO can reject the legal arrangement made by the assessee if the same is a colourable device to avoid or evade tax. However, in the present case it is not so.
11. Referring to the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373 and the decision of Hon'ble Gujarat High Court in the case of Banyan & Berry v. CIT [1996] 222 ITR 831/84 Taxman 515 he submitted that if the arrangement is perfectly legal the same cannot be rejected merely because it results in tax saving. Therefore, it is not a case where the principle of tax avoidance can be applied and depreciation disallowed.
12. So far as the various decisions relied on by the learned DR he submitted that in all those cases the issue was that the assessee is resorting to a device to avoid tax fraudulently or the transaction was colourable, therefore, those decisions cannot be relied upon. So far as the decision of Hon'ble Kerala High Court in the case of Poulose & Methen (P.) Ltd. (supra) relied on by the learned CIT(A) and DR he submitted that this decision does not apply to the assessee's case. In that case, the facts were that the assessee company, as a partner, had taken over the assets of the partnership firm by revaluing them at a very high figure and therefore the Hon'ble Court held that the main purpose of the transfer of the assets to the assessee was to reduce the tax liability. Thus it was a case of transfer from a related party and the fair market value was enhanced deliberately by the assessee to claim higher depreciation. As regards the decision relied on by the learned DR in the case of Dalmia Dadri Cement Ltd. (supra) he submitted that in that case it was held that when the assessee has paid an excessive amount to a connected person in a collusive transaction, the dept. is entitled to ascertain the actual cost. However, this has no applicability to the instant case because the transaction is not with a connected person. Further, it is not a collusive transaction. Vestas or Snowcem had no interest in the reduction of tax liability of the assessee and it has already been shown that what was paid as the cost of the assessee was reasonable considering the market price for a new windmill. Hence, this decision has no applicability. He accordingly submitted that the depreciation as claimed by the assessee should be allowed.
13. We have heard the rival submissions made by both the sides, perused the orders of the AO and CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be decided in this appeal is regarding calculation of depreciation on the cost of the wind mills which according to the AO and CIT(A) is Rs.26,50,000/- being the WDV of the wind mills in the books of Snowcem India Ltd. and which according to the assessee is Rs. 6,69,85,000/- being the amount paid to Vestas RRB India Ltd. towards cost of the wind mills purchased. We find the AO in the instant case applied the provision of Explanation 3 to section 43(1) and calculated the depreciation at the applicable rate on Rs.26,50,000/- which was the WDV of the wind mills in the hands of Snowcem India Ltd., the original owner. While doing so he noted that Snowcem had sold 5 wind mills @ Rs.41,90,000/- each totalling to Rs.2,09,50,000/- to other parties while the 3 windmills sold to the assessee were @ Rs.2,23,28,333/- each totalling to Rs.6,69,85,000/-. Further, all the 3 windmills were in the name of Snowcem in the records of MSEB and purchase of all 3 windmills were not directly made from Snowcem which could have given a clue to the department about the WDV of the windmills. Instead, it was routed through M/s. Vestas, the manufacturers of the windmills and in the bills raised by Vestas, it is not mentioned that the windmills are being resold. Therefore, the AO was of the opinion that the indirect route was resorted to for reducing the tax liability by claiming higher depreciation on enhanced cost. Further, no tax was paid by Snowcem because the short term capital gain declared by it has been set off against huge carry forward loss and no tax was paid by the assessee because of depreciation on the enhanced cost.
14. We find in appeal the learned CIT(A) upheld the action of the AO in calculating depreciation on the 3 wind mills on Rs.26,50,000/- which was the WDV in the books of Snowcem in view of provisions of Explanation 3 to section 43(1). He however held that the AO should not have any grievance because of the windmills being in the name of MSEB since he has already assessed the income from such wind mills in the hands of the assessee. Further, he held that the contention of the AO that no short term capital gain were shown by Snowcem is incorrect. He also held that the AO's contention that no tax was paid by both the parties is not relevant on the facts of the case. We find the Revenue is not in appeal before us against the above observations of the CIT(A).
15. It is the submission of the learned counsel for the assessee that Snowcem India Ltd. being unable to pay the outstanding amount of Rs. 10,23,50,575/- due to Vestas RRB India Ltd. as on 31-03-2003 returned the windmills to Vestas RRB India Ltd. who in turn sold the 3 wind mills to the assessee at a cost of Rs.6,69,85,000/- and it is a commercial transaction. It is also the submission of the learned counsel for the assessee that neither the assessee is related to Vestas RRB India Ltd. or Snowcem India Ltd. nor Snowcem India Ltd. and Vestas RRB India Ltd. are related to each other. Further, the payment has been made by cheque to Vestas RRB India Ltd., Snowcem had declared short term capital gain in its hands and the income declared by the assessee on account of wind mills has been accepted by the AO and there is no adjustment in the income declared on account of wind mills. It is also the submission of the learned counsel for the assessee that the allegation of the AO that Snowcem India Ltd. had sold 5 wind mills @ Rs. 41,90,000/- each totalling to Rs.2,05,50,000/- to other parties while the 3 wind mills sold to the assessee were @ Rs. 2,23,25,333/- each totalling to Rs.6,69,85,000/- and therefore the assessee has taken indirect route for purchase of the windmills at enhanced cost to claim higher depreciation is incorrect since the 5 windmills sold by Snowcem are of 225 KW capacity and are very old whereas the 3 wind mills purchase by the assessee are of 500 KW capacity each and are hardly 2 to 3 years old and therefore, the same is not comparable. It is also the submission of the learned counsel for the assessee that because of higher rate of depreciation the WDV of an asset cannot be treated as market value unless something is brought on record to prove that the price paid towards the cost of the asset is excessive or unreasonable and therefore the provisions of Explanation 3 to section 43(1) is applicable. It is also the submission of the learned counsel for the assessee that WVD as per Income Tax Act cannot reflect the market value of a particular asset. We find merit in the above submissions of the learned counsel for the assessee.
16. Provisions of Explanation 3 to section 43(1) authorises the AO to adopt actual cost for the purposes of depreciation differently from what is shown as the cost of the assessee. It confers the authority to the AO to estimate the value of any used asset, if the AO is satisfied that the main purpose of transfer of such assets directly or indirectly to the assessee is promoted by the object of claiming higher depreciation on such enhanced cost. In the instant case, although the WDV of the wind mills in the books of Snowcem India Ltd. have been shown at Rs.26,50,000/- as on 31-03-2003 we find the assessee had argued before the lower authorities that Snowcem India Ltd. had returned the wind mills to Vestas RRB India Ltd. at a cost of Rs.10,23,50,575 being the amount outstanding as on 31-08-2003 and has offered short term capital gain on the difference between sale price and the WDV. This fact has not been disputed by the revenue. No doubt Snowcem India Ltd. had not paid any tax because of huge losses in its business, however, non payment of tax due to set-off of the income against business loss by Snowcem India Ltd. in our opinion cannot be the sole ground for refusing the depreciation in the hands of the assessee on the cost of the wind mills purchased from Vestas RRB India Ltd. and for which payments have been made by cheque. The submission of the assessee before the lower authorities that neither Snowcem India Ltd. or Vestas are related to each other nor the assessee is related to Vestas RRB India Ltd. or Snocem India Ltd. has not been proved to be false or untrue. The submission of the learned counsel for the assessee that the 5 wind mills sold by Snowcem India Ltd. for a cost of Rs.2,09,50,000/- for which cost of one wind mill was Rs.41,90,000/- are very old and are of capacity of 225KW whereas the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. at Rs.6.69 Crores are hardly of 2 to 3 years old and are of the capacity of 500 KW and therefore those 5 wind mills cannot be compared with the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. cannot be compared also could not be controverted by the learned DR. We find in the instant case no other exercise has been done either by the AO or CIT(A) to determine the fair market value of the windmills and they have simply adopted the WDV of the 3 wind mills in the hands of Snowcem India Ltd. as the cost of the 3 windmills for the purpose of calculating depreciation. We also find merit in the submission of the learned counsel for the assessee that Explanation 3 to section 43(1) is applicable if the assessee claims enhanced cost as the actual cost and the AO is able to show that the cost claimed by the assessee is more than the market value of the asset. Since the cost of a new wind mill has been claimed to be around Rs.2.70 Crores during F.Y. 2003-04, therefore, the market value of the second hand wind mills of 2 to 3 years old cannot be Rs.9 to 10 lakhs as adopted by the AO being the WDV of the wind mills in the hands of the Snowcem India Ltd. especially when the rate of depreciation is 80% on wind mills.
17. We find the Ahmedabad Bench of the Tribunal in the case of Chitra Publicity Co. (P.) Ltd. (supra) at Paras 14 to 18.2 of the order has held as under :
"14. I have carefully examined above circumstances/reasons, arguments and case law in support of application of Expln. 3 to s.43(1) in this case. I have already commented upon circumstance (1) and on "satisfaction" of the AO that main purpose of transaction was to claim higher depreciation on transferred assets in the hands of the assessee. Yet the main purpose of Expln.3, in my view, is to empower the AO to determine actual cost of assets where the assessee is wrongfully claiming depreciation on enhanced cost of such assets. What is actual cost ? How is it to be determined ? Actual cost of an asset to the assessee is always question of fact governed and depending upon the circumstances of the case. However, application of principles for the determination of actual cost is a question of law [see decision of Supreme Court in the case of Jogta Coal Co. Ltd. v. CIT(supra) cited above]. The actual cost normally means real cost, the real worth of the assets acquired by the assessee. Depending upon the facts of the case, it might be WDV in the hands of the transferor but cannot be cost to the transferee. No principle of general and universal application on "actual cost" is possible to lay down. However, in none of the authorities cited and noted above, WDV was taken as "actual cost". Something was added to WDV depending upon the facts and circumstances of the case. In these days of high inflation, it is a matter of common knowledge that there is vast difference between market value of an asset and its WDV as reflected in record. Further, Courts while holding that actual cost is not the "price" paid, were concerned with question whether incidental expenses like freight, warehousing, insurance charges, legal charges incurred in connection with acquisition and interest incurred on capital contributed or borrowed to acquire assets should be added to the price. It was also rightly argued by Shri Soparkar that actual cost should be taken as a commercial concept and understood in the sense in which no commercial man would misunderstand it.
15. The Revenue authorities and learned AM, in the proposed order, have observed that AO is authorized to pierce the veil of the corporate and ascertain the true nature of the transaction. There can be no quarrel on 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 AO to disregard the cost of assets taken by the transferee and determine the actual cost of the assets. He can make a disallowance, provided circumstances envisaged in the provision are satisfied. The Revenue authorities and the learned AM in the proposed order have made out a good case that the main purpose of transfer of asset was reduction of liability to income-tax (by claiming depreciation on enhanced cost). However, as already noted, recording of above satisfaction is not the main purpose of the Explanation. The real purpose of the provision is to authorize the AO to determine actual cost to the assessee. What is the meaning of "actual cost" ? "Actual cost" is to be determined by the AO having regard to all the circumstances of the case. In other words, facts and material on record is to be considered in the process of determination of actual cost. Such cost cannot be any fancy or imaginary figure. This is clear from use of strong words like "determine" and check in the provision on arbitrary exercise of power by the AO. The AO is required to determine the actual cost with the previous approval of the Jt. CIT. Therefore, the AO has to satisfy Jt. CIT that exercise of determination of cost has been carried in a reasonable and proper manner. The provision of approval by the Jt. CIT is for the benefit of the Revenue and the assessee. It is to prevent the AO from taking any amount as "actual cost".
16. It has been contended on behalf of the Revenue that actual cost is not market value but is WDV of assets in the hands of the transferee, particularly on the facts of the case when value of hoarding and of goodwill/trade name was nil in the books of the erstwhile firm. The assessee company, after acquisition claimed depreciation on cost of assets which was arbitrarily fixed without any basis. Reliance, as noted above, has been placed on proviso (c) to s. 47 (xiii), s. 32(1) and s. 43(6) of the IT Act.
17. After careful consideration of above provisions and facts and circumstances of the case, I am unable to accept the stand of the Revenue. As noted above actual cost should ordinarily mean real cost or real worth of assets. If it is not market value, then what is it ? Mechanism to take WDV as provided in expn.2 to s. 43(6) (c) is not available in Expln. 3 to s.43(1). Further, assets whose actual cost is to be determined under Expln. 3 are second hand and it is always difficult to find actual cost or value of such assets as compared to new assets. In the case of transfer of an asset between two unconnected parties price fixed is ALP governed by market condition. This ALP between two unconnected parties is nothing but market value of the asset. This ALP has to be taken as the "actual cost" for purposes of depreciation. There is no way to ignore it and it is not possible to record merely that the main purpose of transaction is the reduction of income-tax liability. Such ALP or market value cannot have a different meaning in case of a transaction between connected and related parties if fixed bonafidely as per market conditions. There is no prohibition or connected parties to carry arms' length transactions where real value of them transferred is paid. Law frowns on fraudulent transaction carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the AO under Expln. 3 to s.43(1) has to determine the "actual cost" to assessee which can only mean arm's length value or real value or worth of assets transferred. Above proposition has been duly accepted by Courts. In the case of Ginners & pressers (P) Ltd. v. CIT (supra), the decision of Bombay High Court strongly relied upon by the Revenue, their Lordships have made the following observations.
"There is no doubt that, in the absence of fair market value of the assets transferred being known on the date of transfer, the requisite inference under the proviso to s. 10(5)(1) of the Act cannot be drawn. But it is not as if the taxing authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question of applicability of the proviso to s. 10(5)(1) to the facts of the present case".
17.1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining "actual cost". The provision requires consideration of all the circumstances including cost in the hands of the transferor, WDV, inflationary trends, conditions and life of assets transferred etc. in the exercise of determination of cost of assets. It is true that cost shown in the transfer is primarily the cost to the transferee and such cost therefore, is a piece of good evidence. But cost shown is not final and AO is empowered under Explanation to revalue the asset and determine its actual cost. He has to determine the cost on some good and acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed. This action of the AO endorsed by higher authorities and in the proposed order of learned AM, in my view has no legal support. As already discussed, provisions of s.47(xiii) or of s.43(6) are not attracted here as these provisions have very different purposes to serve. These deemed provisions cannot be read in the Expln. 3.
17.2 The plain language of the provision [Expln.3 to s.43(1)] leaves no amount of doubt that it is AO who has to record satisfaction relating to main purpose of the transaction to the assessee (reduction of liability to income-tax). It is AO who has to determine "actual cost" of assets having regard to all the circumstances of the case and with the previous approval of the Jt. CIT. It should, therefore, leave no doubt that burden to determine "actual cost" in accordance with law is on AO and not on the assessee. The AO has to show that he has gathered relevant material and determined actual cost after application of mind. His action is required to be approved by his superiors.
18. In the case of CIT v. Jogta Coal Co. Ltd. (supra), their Lordships at P. 99 of the report referred to the case of Craddock v. Zevo Finance Co. Ltd. (1946) 27 Tax Cases 267. Their Lordships have stated as under :
"The learned Law Lords came to the conclusion that the Crown had failed to establish that the value of the investments was less than the nominal value of the consideration for which the respondent company had acquired them, namely, the liability to discharge the debentures and interest thereon and the allotment of the share capital as fully paid".
18.1 The jurisdictional High Court in case of Ashwin Vanaspati Industries v. CIT (supra) at P.33 observed as under :
"Hence, it is crystal that the AO is obliged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Expln. 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer's opinion. At the same time, merely because a document in the nature of contract or purchase is entered into denoting a certain price the same would not conclusively establish the correctness of the claim made by an assessee if the AO is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. In such circumstances, it would always be open to the AO to go behind the contract and ascertain the actual cost so as to determine the correct liability to tax".
18.2 Inspite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that "AO is obliged", "duty cast on AO" to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No attempt whatsoever was made by the AO or by the CIT who approved of his action or by CIT(A) to collect any material or to take any steps to determine the actual cost of the assets. The evidence produced by the assessee before the AO in the shape of valuation report was wrongly rejected and on reasons which are totally unsustainable. In support of value (cost of hoardings at Rs.4,77,96,000/- and of goodwill at Rs.3 crores), the reports of the registered valuer were placed before the AO. The AO did not consider above reports, although it was incumbent upon him to dislodge them. The learned CIT(A) in the order for asst. yr. 2005-06 rejected the report of valuation of hoardings as on Ist April, 2003 as the report was dt. 3rd Oct., 2004 and held it to be got prepared to suit the assessee's requirement. The learned AM in his proposed order, took a similar view and cast burden on the assessee with a general observation that assessee did not lead any supporting evidence to justify the cost claimed. The learned AM's views on the production of documents are factually incorrect. The learned JM in his proposed order has rejected all the above reasons including the reason given by the learned CIT(A) in the appellate order".
18. We find the Mumbai Bench of the Tribunal in the case of Western Maharastra Flourine Chemical Industries (supra) has held as under (Short notes) :
"Regarding the alternative plea of the AO for granting depreciation to the assessee on the basis of WDV as per IT Act in the hands of the vendor by invoking Expln. 3 to s.43(1), there is force in the arguments of the Authorised Representative of the assessee that there is no scope of any reduction in tax liability of the assessee in the present year because the returned income is loss and assessed income is also a loss and as per the Explanation, the AO should be 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. The Revenue fails this test because there is no reduction of liability to income-tax by claiming depreciation with reference to enhanced cost in view of loss even after disallowance of depreciation. This is an admitted fact that in IT Act, depreciation is allowed at a higher percentage as an incentive, and hence, WDV as per IT Act cannot reflect the market value of the particular fixed asset. Whereas, the assets are sold on the basis of market value of the assets and not on the basis of WDV as per IT Act. For extra depreciation allowed to the vendor as per IT Act as an incentive, the vendor has to be assessed for capital gains on sale of assets by reducing the WDV as per IT Act from sale proceeds of the assets. But in the hands of the assessee, the actual cost paid by the assessee for the assets should be considered for allowing depreciation to the assessee, particularly so, when the conditions required for invoking Expln. 3 to s. 43(1) are not being fulfilled. The AO was not justified in disallowing the claim of the assessee for depreciation or in reducing the claim of depreciation by invoking Expln. 2 to s. 43(1). - Union of India v.Azadi Bachao Andolan [2003] 184 CTR (SC) 450 : [2003] 263 ITR 706 (SC) and Dy. CIT v. Mahendra M. Mehta [2004] 89 TTJ (Mumbai) 1 relied on".
19. Various decisions relied on by the learned DR are not applicable to the facts of the present case. In the case of Mahindra Sona Ltd. (supra) it has been held that wherein an asset was already in use in a business in hands of one person and its WDV has been ascertained by the AO and that person transfers assets to another person for a price exceeding this WDV, it is open to AO to refuse to accept the sale price as "actual cost" to purchaser in purchaser's assessment if he is satisfied that main purpose of transfer was reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. However, the same is not applicable to the facts of the present case. In the instant case, Snocem India Ltd. has not transferred the wind mills to the assessee and the assessee has purchased the wind mills at a cost of Rs. 6,69,85,000/- from Vestas RRB India Ltd. and payment has been paid by cheque. It has also been demonstrated by the assessee that it is not related to either Snowcem India Ltd or Vestas RRB India Ltd. Similarly Vestas RRB India Ltd. and Snowcem India Ltd. are not related to each other.
20. Similarly the decision of the Hon'ble Kerala High Court in the case of Poulose & Mathen (P.) Ltd. (supra) is also not applicable to the facts of the present case. In that case the assessee company, as a partner, had taken over the assets of the partnership firm by revaluing them at a very high figure for which the High Court held that the main purpose of the transfer of the asset to the assessee was to reduce the tax liability. Thus, it was a case of a transfer from a related party and the fair market value was enhanced deliberately by the assessee to claim higher depreciation. However, in the instant case the wind mills are not purchased by the assessee from a related party. Further, the price paid by the assessee cannot be held unreasonable especially when the cost of a new wind mill of 500KW capacity would have been within a price range of Rs.2.50 Crores to Rs. 2.70 Crores and the average life of a wind mill being 20 years the price paid for a wind mill of 2 to 3 years old at Rs. 2.25 Crores approximately cannot be held as unreasonable which is the submission made by the assessee before the lower authorities and not controverted by the Revenue. Therefore, the decision relied on by the CIT(A) and the learned DR, in our opinion, cannot be applicable to the facts of the present case.
21. So far as the reliance of the decision of Hon'ble Delhi High Court in the case of Dalmia Dadri Cement Ltd. (supra) we find it was held in the above case that when the assessee has paid an excessive amount to connected persons in a collusive transaction, the department is entitled to ascertain the actual cost. However, in the instant case the transaction is not between connected persons and it has not been proved or brought on record by the lower authorities that it is collusive in nature. We find merit in the submission of the learned counsel for the assessee that Vestas RRB India Ltd. or Snowcem had no interest in the reduction of tax liability of the assessee since nothing has been brought to our notice that either Vestas RRB India Ltd. or Snowcem are related to the assessee or they are related to each other.
22. The various other decisions relied on by the AO and CIT(A) are also distinguishable and not applicable to the facts of the present case because in those cases the transactions have taken place between related parties. In this view of the matter and relying on the decision of the Third Member (Ahmedabad Bench) of the Tribunal in the case of Chitra Publicity Co. (P.) Ltd. (supra) and the decision of the Mumbai Bench of the Tribunal in the case of Western Maharastra Flourine Chemical Industries (supra) we hold that the actual cost paid by the assessee at Rs.6,69,85,000/- to Vestas RRB India Ltd. being cost of 3 wind mills should be considered as cost price for allowing the depreciation to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed.
23. In the result, the appeal filed by the assessee is allowed.