ORDER

T.K. Sharma, J.M.—These two appeals have been filed by the assessee for the asst. yrs. 2004-05 and 2005-06, directed against the respective orders of the CIT(A)-I, Baroda for these asst. yrs. 2004-05 and 2005-06. These two appeals involving identical points were heard together and are now disposed of by a common order for the sake of convenience. The grounds of appeal are reproduced below :

"(a) The learned CIT(A) has erred in law and on facts in confirming the action of the AO in disallowing claim of depreciation amounting to Rs. 1,97,16,739 for asst. yr. 2004-05 and Rs. 1,47,81,753 for asst. yr. 2005-06.
(b) The learned CIT(A) has erred in law and on facts in confirming the action of AO in altering and reducing the actual cost of the block of assets in the hands of the assessee.
(c) Both the lower authorities have erred in law and on facts in passing the orders without properly appreciating the fact and that he further erred in grossly ignoring various submissions, explanations and information submitted by the assessee from time to time which ought to have been considered before passing the impugned order. That the disallowance of depreciation by invoking Expln. 3 to s. 43 of the Act is bad and illegal because the alleged approval granted by Jt. CIT is vitiated in law firstly because the assessee was not heard before any such approval and secondly because the same has been granted mechanically. This action of both the authorities is in clear breach of law and principles of natural justice and therefore deserves to be quashed.
(d) The learned CIT(A) has erred in law and on facts in confirming the action of AO in charging interest under ss. 234B and 234C of the Act.
(e) The learned CIT(A) has erred in law and on facts in confirming the action of AO in initiating penalty under s. 271(1)( c) of the Act without recording mandatory satisfaction as contemplated under the Act."

2. Briefly stated the facts are that :

(a) A firm namely Chitra Publicity Co. which was in the outdoor advertising business has been succeeded by the assessee company on 1st April, 2003. The firm had a total number of 2,100 hoardings at various places all over Gujarat.
(b) The assessee has claimed it as a succession within the meaning of s. 47( xiii) of the IT Act. It has submitted that it satisfies all the conditions of s. 47( xiii). Shri. Atul K. Mehta and Shri Bakulesh K. Mehta were the partners of the firm and now they are directors of the assessee company. The assessee's contention was that the main purpose behind the takeover of the business of the erstwhile firm by the corporate entity was done with a view to acquire greater acceptability in commercial circles and amongst the multinational clients.
(c) The transfer of the entire business of Chitra Publicity Co. to the assessee was done through a memorandum recording transfer of the entire business, which was signed on 1st April, 2003, as per which the running business along with all the assets, rights, obligations and liabilities were transferred for a consideration of Rs. 8 crores. The sale consideration of Rs. 8 crores was discharged by issue of 50 lakhs equity shares of Rs. 10 paid-up value at a premium of Rs. 6 per share. For working out this sale consideration, value of hoardings was taken at Rs. 4,77,96,000 out of the total net value of assets of the partnership firm at Rs. 8,25,01,768. The assessee claimed depreciation on the enhanced value of the assets of the firm, on "trade name" and also on hoarding boards which were not part of the fixed assets, of the firm.
(d) During the course of assessment, the AO invoked the provisions of Expln. 3 to s. 43(1) in this case, after being satisfied that the main purpose of the transfer of assets was reduction of liability to income-tax by claiming depreciation with reference to the enhanced cost. The AO, with the approval of Addl. CIT determined the 'actual cost' of hoardings etc. as WDV as on 31st March, 2003 for the erstwhile partnership firm, after taking into consideration all the circumstances of the case.
(e) The AO held that considering the facts and circumstances of the case and provisions of the law, the closing WDV of the previous year 2002-03 (asst. yr. 2003-04) of assets, in the case of the firm as per the provisions of the IT Act, should be taken as the opening WDV in the hands of the assessee company for the purpose of computation of depreciation of asst. yr. 2004-05. He further held that in this case, the main purpose of the transfer of assets at enhanced value is the reduction of the liability to income-tax by claiming deprecation with respect to an enhanced cost. Hence, he was entitled to invoke the provisions of Expln. 3 to s. 43(1) of the Act and recompute the actual cost of the assets transferred. The issue involved and the contentions of the assessee for asst. yr. 2005-06 are identical with that of asst. yr. 2004-05.
(f) The assessee during the appeal proceedings before the CIT(A) for asst. yr. 2004-05 and asst. yr. 2005-06, challenged the adoption by the AO of the WDV as on 31st March, 2003 as 'actual cost' on the ground that the valuation of assets was not ad hoc or arbitrary, it was based on a registered valuer's, namely Mr. Induprasad C. Patel, valuation report determining the value of the hoardings as on 1st April, 2003. It further argued that the predecessor firm had not claimed any depreciation on the asset. The value of these hoardings in the books of the firm was nil and hence, it was not possible for it to claim any depreciation, whatsoever. The tax saving was only incidental to the transaction and not the main purpose of the transaction. The whole transaction was driven by the need for corporatisation to gain greater acceptability amongst MNC clientele, access funds/JV partners, transparency, etc.
(g) The CIT(A) for asst. yr. 2004-05 negated the arguments of the assessee and held that the transfer was only a cover up to the main purpose of gaining excess depreciation claim.
The CIT(A) for asst. yr. 2005-06 also followed the CIT(A)'s order in the earlier year and further observed that the value of hoardings of Rs. 4,77,96,000 as on 1st April, 2003 was same as the value determined by the registered valuer. The CIT(A) held that while the memorandum was signed on 1st April, 2003, the registered valuer's report determining the value of hoardings as on 1st April, 2003 was dt. 3rd Oct., 2004. The CIT(A) observed that how could the assessee adopt identical value of the hoardings at the time of signing of memorandum of transfer on 1st April, 2003, when the registered valuer determined this value on 3rd Oct., 2004 is not clear. According to him, there was no way that the assessee or the erstwhile firm could have known the identical value on 1st April, 2003, which the registered valuer determined only on 3rd Oct., 2004. The only reasonable inference could be that the registered valuer's report was got prepared to suit assessee's own requirements. Thus, the CIT(A) held that the transfer of assets was not at arm's length and was mainly to reduce the liability to the income-tax by claiming depreciation with reference to an enhanced cost and is a "colourable device".
(h) The CIT(A) also held that the partners of the erstwhile firm themselves became the sole directors of the assessee company and thus the ownership of the business remained effectively in the same hands after its transfer as a going concern from the erstwhile firm to the assessee company. As against this the assessee's contention was that the main purpose behind taking over of business of erstwhile firm by the corporate entity was with a view to acquire greater acceptability in commercial circles and amongst the multinationals could have some merit in it.
However, the CIT(A) concluded that categorisation of hoardings as capital assets and their revaluation at enhanced cost by the same management can be said to be done only with a view to claim higher depreciation and thereby reduce the liability to income-tax and therefore the AO was right in invoking Expln. 3 to s. 43(1) for determining the actual cost of: hoardings etc.
(i) The assessee is in appeal before us against the above orders of the CIT(A).

3. Before resolving the dispute, we feel it appropriate to note here the relevant provisions of the IT Act, 1961 :

"32. Depreciation—(1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets ;

(ii) know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

……………

(ii) in the case of any block of assets, such percentage on the WDV thereof as may be prescribed :

Explanation 2 : For the purposes of this sub-section 'WDV of the block of assets' shall have the same meaning as in cl. (c) of sub-s. (6) of s. 43.

43. Definitions of certain terms relevant to income from profits and gains of business or profession.—In ss. 28 to 41 and in this section, unless the context otherwise requires—

(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :

………………

Explanation 3 : Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case."

Thus, the crux of the issue which arises for our consideration is that whether the Expln. 3 to s. 43(1) of the Act is attracted to the present case. The Explanation is applicable when assets which were used by any other person for the purpose of business prior to date of acquisition are transferred to another person and the main purpose of such a transfer of such assets is the reduction of tax liability of the other person by enabling him to claim depreciation on the enhanced cost of acquisition. If the AO is satisfied that such circumstances exist, then the actual cost shall be such amount as he may determine.

4. The learned Authorised Representative argued before us that the case of the assessee is covered by a decision of the Gujarat High Court in Ashwin Vanaspati Industries v. Commissioner Of Income-Tax [2002] 255 ITR 26 (Guj) . The facts of this case were as follows :

(a) Certain members of Thakkar family entered into a partnership on 28th Oct., 1961, to carry on business in the name of Ashwin Industries (hereinafter referred to as the 'firm'). The firm carried on business with minor changes in the constitution from time to time till October, 1976.
(b) On 21st Oct., 1976, the applicant-assessee, Ashwin Vanaspati Industries (P) Ltd. was incorporated with all the shareholders being erstwhile partners viz., belonging to Thakkar Group.
(c) On 24th Oct., 1976, the assessee company entered into a partnership with Thakkar Group and joined the running business of the firm, M/s Ashwin Industries.
(d) On 30th July, 1978, the firm got various assets valued by one Shri R.M. Sheth, a registered valuer.
(e) On 5th Aug., 1978, all the shares held by Thakkar Group of the assessee-company were transferred to one Patel Group and Thakkar Group gave up the control and management of the applicant.
(f) On 6th Aug., 1978, the partners of the firm entered into a dissolution deed which was made effective from 31st July, 1978 and the company belonging to the Patel Group received the business of the erstwhile firm on dissolution.
(g) Thereafter, the assessee-company filed a return of income on 30th June, 1980, showing loss of Rs. 21,45,604 for asst. yr. 1980-81. In the return of income filed by the assessee company, depreciation was claimed on the enhanced value of factory building, residential building and plant and machinery, as according to the assessee company that was the actual cost incurred by the assessee for acquiring the said assets. The ITO held that the dissolution of the firm which had taken place during the accounting period was just a method to defraud the Revenue by transferring all assets of the firm to the assessee company and this device was adopted for the purpose of claiming higher depreciation. The reasons which weighed with the IT (authorities) for arriving at this conclusion were—

(i) The assessee company had been incorporated with the main object of "to acquire and takeover from Ashwin Industries, a partnership concern, land and building, and all other assets".
(ii) All machineries and assets had been taken over as a running concern. There was no shifting of machineries and various assets. Instead of partnership concern running the machineries, the company had started running machineries.
(iii) That, it was settled law that a partner acquiring assets on dissolution of the firm did not amount to transfer.
(iv) All the partners who were interested in the firm were interested in the company.

(h) The IAC further placed reliance on Expln. 6 to s. 43 of the Act and applying the analogy of the said provision confirmed the view of the ITO that the assessee was entitled to depreciation only on the WDV of the assets and not on the enhanced value as claimed by the assessee.

4.1 Hon'blc Gujarat High Court upheld the claim of the assessee and allowed depreciation on the enhanced value. It held as under :

"……….Hence, it is crystal clear 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 of purchase is entered into denoting certain price the same would not conclusively establish 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 contract and ascertain the actual cost so as to determine the correct liability to tax. But at the same time, it needs to be emphasized that Expln. 3 does not require determination of market value at the hands of the AO but speaks of determination of actual cost by the AO with prior approval of the LAC having regard to all the circumstances of the case.

In the present case, crux of the matter thus boils down to as to whether the transaction was entered into by the assessee to reduce its tax liability viz., whether the dissolution had been effected with the main purpose of reducing liability to income-tax by virtue of the said transaction……..

The question then arises is : Expln. 3 to s. 43(1) of the Act only talks of assets which were used by any other person for the purpose of business prior to date of acquisition and are transferred and the main purpose of transfer of such assets is reduction of tax liability by claiming depreciation on the enhanced costs : the assessee having acquired only assets can the provision not become applicable ? First of all, we do not have any finding recorded by any authority to the effect that the main purpose of the transfer was for claiming depreciation at an enhanced cost. Though the ITO has stated that dissolution had been effected to defraud the Revenue by transfer of assets of the firm to the company what is more material and necessary is that there is no finding to the effect that the enhanced cost was incurred with the main purpose of reduction of liability to income-tax by claiming depreciation on the enhanced cost. In fact, the assessee has not claimed depreciation on enhanced cost of all assets but only in relation to three assets and more significantly such enhanced cost is supported by valuation report obtained prior to the point of time of the dissolution. The valuation report is by a registered valuer. Neither in the assessment order nor in the Tribunal's order is there any whisper that the valuation report by the registered valuer is incorrect in any manner whatsoever. Once there is a report by the registered valuer it is incumbent upon an authority to dislodge the same by bringing adequate material on record in the form of Departmental valuation report, because in absence of the same a technical expert's opinion (registered valuer's report) cannot be dislodged by any authority by merely ignoring the same. In the present case that is what has happened. Neither the AO nor the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report.

The assessee having made a claim for depreciation on enhanced cost, which is actual cost in its hands, it was necessary for the authority who wanted to determine the 'actual cost' (as required by Expln. 3 to s. 43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted book value or the WDV in hands of the assessee-company. As can be seen from the Expln. 3 to s. 43(1) of the Act, the ITO is required to determine actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the WDV was the actual cost, he ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. On his having failed to do so, even if the earlier portion of the provisions, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied.

Considering the matter from another angle, the ITO has merely stated that the dissolution was a method adopted to defraud the Revenue but nowhere is it stated that the main purpose of transfer of such assets was for claiming depreciation with reference to enhanced cost. The Tribunal has in para 13 of its order referred to various figures of carried forward business loss, carried forward unabsorbed depreciation and investment allowance, etc. in support of its conclusion but it has lost sight of the fact that these are all incidents or effects of the transaction and not the purpose. As can be seen from the assessment order for asst. yr. 1980-81, the ITO himself has allowed the unabsorbed depreciation and business loss as well as investment allowance to be carried forward. Similarly, for asst. yr. 1981-82 the ITO himself has deducted the aforesaid items which remained unabsorbed in the preceding assessment year to be set off against the income from business computed for asst. yr. 1981-82. Therefore, the AO has never considered that the transaction was entered into with a view to reduce tax liability by claiming set off of unabsorbed depreciation, carried forward business loss and investment allowance, and rightly so in our view, as section does not stipulate that the main purpose of the transfer of assets is to reduce income-tax liability by setting off various items of brought forward loss, etc.

The Tribunal was, therefore, not right in law in holding that the assessee was not entitled to claim depreciation on the enhanced value of the assets having regard to the relevant provisions of the Act………. The question referred to us is, therefore, answered in the affirmative i.e., in favour of the assessee and against the Revenue."

4.2 The learned Authorised Representative explained that the above decision of Gujarat High Court squarely covers the case of the assessee. He painstakingly, compared the above decision with the facts of the assessee as follows :

(a) As explained in the above decision, the AO has not discharged his obligation because he has not explained why according to him, Expln. 3 is attracted and what are his reasons for recording such a satisfaction. All that he mentioned is that a colourable device has been adopted to reduce the tax liability of the assessee.
(b) As in the above case, in the case of the assessee other than a remark to the effect that the Revenue has been defrauded by the transfer of assets, there is no finding to the effect that the enhanced cost was for tax avoidance.
(c) As in the above case, in this case also, the assessee has not revalued all its assets but only those assets which were not reflected in its books, i.e., the hoardings. It has retained the actual cost of all other assets. Further, the enhanced cost is confirmed by a valuation report.
(d) As in the above case, the valuation report obtained by the assessee is from a registered valuer. Neither the assessment order nor the CIT(A)'s order explains why the valuation report by the registered valuer is incorrect in any manner whatsoever. As held by the Gujarat High Court, once there is a report by the registered valuer it is incumbent upon the authority to dislodge the same by bringing adequate material on record in the form of Departmental valuation report, because in absence of the same the technical expert's opinion (registered valuer's report) cannot be dislodged by any authority by merely ignoring the same. In the present case also that is what has been done. Neither the AO nor the CIT(A) has even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever.
The CIT(A) has in his order for asst. yr. 2005-06, observed that the valuation report has been prepared to suit the assessee's own requirements. It was explained to the CIT(A), by the assessee, that the value of Rs. 4,77,96,000 as on 1st April, 2003, which was the value on the date of the transfer, was arrived at by it on the basis of the cost of construction prevailing in the State of Gujarat for erecting outdoor hoardings. The assessee explained that it has been in this business in Gujarat for over 70 years and hence, has a firsthand experience of the valuation of the hoardings. Hence, this was the basis for arriving at the transfer amount. Subsequently, the assessee got this valuation reconfirmed by Mr. Induprasad Patel. He also adopted the same valuation basis, i.e., the cost of the hoardings basis, which is a very scientific and objective method of valuing hoardings. Hoardings are not a marketable commodity and hence, one has to value them on such basis only. Although the report is dt. 3rd Oct., 2004, what is essential to note is not the date of the report, but the date as on which it has been prepared. The report states that it is as on 1st April, 2003, i.e., the date of the transfer and it reconfirms the valuation adopted by the assessee. Once the basis of valuation is the same and since it considers the costs of labour, material, colour, RCC, etc., prevailing as on 1st April, 2003, then it is not a matter of surprise that the valuation is the same. The CIT(A) ignored all these important submissions made by the assessee while passing his order.
(e) As explained by the Gujarat High Court in the above case, even in this case, the assessee has made a claim for depreciation on the enhanced cost and hence, it was necessary for the AO who wanted to determine the 'actual cost' to place some solid tenable evidence on record in rebuttal of the claim. The AO cannot simply substitute his opinion and adopt the book value or the WDV in hands of the assessee, The AO did not determine the actual cost having regard to all the circumstances of the case and did not support the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer.
(f) Thus, on all cases, the above-mentioned decision of the Gujarat High Court is squarely applicable to the facts and circumstances of the assessee.

4.3 The learned Authorised Representative also vehemently argued before us that the decision of the Gujarat High Court in the case of Ashwin Vanaspati ( supra) is binding in the State of Gujarat since it has territorial jurisdiction in the State of Gujarat as held by the Supreme Court in the case of CIT v . Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) . Further, the decisions of a High Court are binding on all the Tribunals situated within its territorial jurisdiction as held in several cases, such as, Taylor Instrument Co. (India) Ltd. v. Commissioner Of Income-Tax. [1998] 232 ITR 771 (Delhi) . Thus, unless a decision of a jurisdictional High Court can be distinguished from the case in question, the Tribunal which falls within that jurisdiction is bound to follow the decision of that High Court.

4.4 Drawing the attention of the Bench, the learned Authorised Representative pointed out that this Tribunal has also had an occasion to consider the Expln. 3 to s. 43(1) in the case of Unimed Technologies Ltd. v. Dy. CIT [2000] 73 ITD 150 (Ahd) . This Tribunal, then held, that Expln. 3 to s. 43(1) can only be applied if the AO is of the view that the fair market value of the assets has been inflated to claim excess depreciation. Only then, can he replace the fair market value with the estimated cost. In this case the fair market value of the assets had been certified to be Rs. 2,92,00,000 by a registered valuer who had inspected the property and prepared a report. The AO had not appointed his own valuer for the valuation of the disputed assets and he had not thought it necessary to examine the said valuer before arriving at his own conclusion as to the value of the assets. The Tribunal held that in the absence of any other valuation report prepared by any agency and there being no other evidence to show that the report is not reliable, the valuation report filed by the assessee could not be ignored.

4.5 The learned Authorised Representative argued that what s. 47(xiii) of the Act requires continuity of partners as shareholders. It also envisages that the transfer would be at above the cost and that is why the question of exemption comes in play. This section has been enacted recognising the need for corporatisation of firms. The learned Authorised Representative also pointed out that various Indian and English decisions have laid down the principle that in taxing statutes, the Courts while probing the substance of the transaction cannot displace the legal effect of a transaction. Some of the decisions relevant in this respect are as follows :

(a) CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC)

In this case, the Revenue advanced the same arguments as have been made by the AO/CIT(A) in the case of the assessee. A partnership firm transferred its machinery to a private limited company, in the share capital of which the partners had the same interest as they had in the partnership firm. The ITO contended that both the entities were one and the same. The Supreme Court held that the firm and the company are separate legal entities and the company is distinct from the firm under general law. The legal effect of the transfer is to convey for consideration the rights of the firm in the machinery to the company. The Supreme Court laid down the ratio that in taxing a receipt to income-tax, the authorities while probing the substance of the transaction cannot displace its legal effect. This decision has been reaffirmed by the Supreme Court in its decision in the case of CIT v . Artex Manufacturing Co. [1997] 227 ITR 260 (SC) .

(b) Macniven (HM Inspector of Taxes) v Westmoreland Investments Ltd. [2002] 255 ITR 612 (HL)

In this decision, the House of Lords of England, reiterated the principle that the Courts cannot disregard the legal effect of what was done and give effect to the underlying substance. The House of Lords held that this was a cardinal principle which was upheld by various Courts since the decision in the case of IRC v . Duke of Westminster [1936] AC 1. If the payments were in law good contractual payments then the Courts are not entitled to disregard their legal effect and treat them as something else.

This decision in the case of Macniven ( supra) was followed by the Supreme Court in the case of Azadi Bachao Andolan (infra).

(c) Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC)

In this decision, the Supreme Court approved the principle explained in Macniven's case (supra).

4.6 The learned Authorised Representative further argued that the AO is under the provisions of Expln. 3, entitled to unravel the actual purpose behind the transaction and if he is satisfied that the only reason for the transfer was avoidance of tax by claiming higher depreciation, then he can determine the actual cost. In the event of mergers, demergers, etc., the WDV of the assets in the hands of the transferor is taken as the WDV to the transferee, as per the express provisions in the Act. This is regardless of whether or not the parties are from the same group. However, in the case covered by Expln. 3 to s. 43(1), a discretion is given to the AO to ascertain the actual cost, if and only if, he is satisfied that the transfer was done for tax avoidance. A further safeguard is provided for the assessee by requiring a prior approval of the Jt. CIT.

Thus, the powers conferred upon the AO are wide in nature and have all the trappings of a judicial power. However, this power is not an arbitrary which can be exercised as per his whims and fancy. He must act according to the rules of reason and justice, not according to private opinion; according to law and not humour. His discretion cannot be vague and fanciful but must be legal and regular. He must consider the contention raised on merits. His power is a power coupled with a duty to exercise it in the interest of justice to both the parties. The AO cannot merely state that the purpose of the transfer was for tax avoidance. He must demonstrate the same with facts and figures. Reliable evidence should be produced to substantiate his claim, Such a conclusion by the AO requires a more careful examination of the facts and circumstances of the case, and he cannot simply invoke the provisions of Expln. 3 by a cryptic order.

The assessee's case is also supported by a decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) . In this case, the Supreme Court was examining the provisions of s. 52(2) of the Act. This section provided that if in the opinion of the ITO, the fair market value of the capital asset transferred was more than the declared consideration by at least 15 per cent of the value so declared, then with the previous approval of the IAC, the ITO could substitute the fair market value for the capital gains computation. The Court held that s. 52(2) can be invoked only where the consideration for the transfer has been understated. Further, the Supreme Court held that the burden of proving such understatement or concealment always lies on the Revenue.

Similarly, in this case, the onus of proving the tax avoidance by the assessee in this case, lay on the Revenue, which it has failed to discharge.

5. The learned Departmental Representative, on the other hand, supported the order of the AO and the CIT(A).

6. We have carefully considered the facts and circumstances of the case as well as the rival submissions made before us. We have also gone through the rulings and precedents cited before us on behalf of the assessee.

6.1 We find no merits in the CIT(A)'s observations on the valuation report submitted by the assessee. Although the report is dt. 3rd Oct., 2004, what is essential to note is not the date of the report, but the date as on which it has been prepared and the basis adopted for the valuation. The report states that it is as on 1st April, 2003, i.e., the date of the transfer and it reconfirms the valuation adopted by the assessee on the basis of replacement cost of hoardings. Once the basis of valuation is the same and since it considers all the costs of labour, material, colour, RCC, etc., prevailing as on 1st April, 2003, then it is not a matter of surprise that the valuation is the same. The AO has neither produced an alternative valuation report nor has he examined the valuer nor has he found any fault with the valuation methodology. As held by this Tribunal in Unimed Technologies (supra), if the AO does not disprove the assessee's valuation report, then the same cannot be ignored. The CIT(A) too has not examined or attacked the valuation or explained why, according to him, the method of valuation adopted by the valuer is incorrect.

6.2 As held by the Hon'ble Gujarat High Court (supra) we do not see any express findings recorded by any authority to the effect that the main purpose of the transfer was for claiming depreciation at an enhanced cost. Though the CIT(A) has stated that the transfer had been effected to defraud the Revenue by transfer of assets of the firm to the company, what is more material and necessary is that there should be a finding to the effect that the enhanced cost was incurred with the main purpose of reduction of liability to income-tax by claiming depreciation on the enhanced cost. A mere statement to this effect is not necessary. It must be backed up by a concrete finding. It was necessary for the AO who wanted to determine the 'actual cost' to place some evidence on record. He ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer.

6.3 We agree with the assessee's contention on s. 47(xiii). As observed by the Supreme Court in the case of B.M. Kharwar ( supra) a firm and a company are two separate legal entities and a transfer between them is valid even if all the partners of the firm are the shareholders of the company. Hence, the contention of the CIT(A) that the firm and the company are not separate entities holds no merit. As laid down by the Supreme Court, in probing the substance, the legal effect of the transaction cannot be displaced.

6.4 We also agree with the assessee that the AO is bound to exercise his discretion of substituting the actual cost in a judicious manner based on cogent reasons. He must be objective in his approach and should not reach his conclusion merely on his whims and fancies. The onus was on the AO to disprove the contention of the assessee, which onus he has failed to discharge. The Supreme Court in the case of K.P. Varghese ( supra) while examining an analogous provision has emphasised that the onus is on the Revenue.

6.5 Since we have not been shown any reason why the decision of the Gujarat High Court in the case of Ashwin Vanaspati ( supra) is not applicable to this case, we are inclined to follow this decision.

6.6 In the light of above discussion, the assessee's appeals for asst. yr. 2004-05 and for asst. yr. 2005-06 are allowed regarding its claim for depreciation. Accordingly, the depreciation claim of the assessee for asst. yr. 2004-05 of Rs. 1,97,16,739 and the claim for asst. yr. 2005-06 of Rs. 1,47,81,753 should be allowed.

7. The next issue relates to charging of interest under ss. 234B and 234C of the Act, which is consequential and therefore, it needs no specific adjudication.

8. The next issue relates to initiation of penalty under s. 271(1)(c) of the Act. This ground is dismissed as not entertainable as there is no provision for filing appeal against initiation of penalty under s. 271(1)(c) of the Act.

9. In the result, both the appeals of the assessee are partly allowed.

A.N. Pahuja, A.M. :16th July, 2009

I have gone through the order of the learned Brother but am not able to persuade myself to agree with the conclusions drawn by him in para 6 of the proposed order on the issue of depreciation.

2. Facts, in brief, as per relevant orders are that during the course of assessment proceedings, the AO noticed that the firm M/s Chitra Publicity Co. comprising two partners, Shri Atul K. Mehta and Shri Bakuleshbhai K. Mehta sold their entire business as a going concern to the assessee company w.e.f. 1st April, 2003, wherein the aforesaid two partners became directors. The memorandum of sale by the firm to the company is signed only by these two persons on behalf of the two entities. The AO noticed from the depreciation chart annexed with the tax audit report for the financial year ending 31st March, 2003 that the said firm claimed depreciation of only Rs. 3,68,585 on their assets. The relevant details of various assets are reflected on p. 3 of the assessment order. In the balance sheet of the firm as on 31st March, 2003 the assessee valued/revalued the following assets :

In the schedule of fixed assets of the firm, the assessee reflected opening balance of Rs. 25,38,000 on account of goodwill, on which no depreciation had been claimed nor on the trade name. Moreover the firm having claimed entire expenditure on construction of hoardings as revenue expenditure, these hoardings were never shown as part of fixed assets. However, the assessee company in their computation of depreciation as reproduced on p. 2 of the assessment order had shown WDV of various assets as on 1st April, 2003 as nil while showing addition of Rs. 4,77,96,000 as on 1st April, 2003 on account of hoardings under the head plant and machinery. In the light of these facts, the AO show caused the assessee as to why closing WDV of various assets for the financial year 2002-03 in the case of the firm be not adopted as the opening WDV of various assets in the company since the main purpose of transfer of assets at enhanced value was nothing but reduction in liability of income-tax by claiming depreciation on enhanced cost. In response, the assessee submitted that the company acquired all the assets and liabilities of the erstwhile firm i.e., it was a case of succession of business with all the assets and liabilities. The assets were acquired at the prevailing fair market value, the partnership firm having obtained valuation report from the registered valuers. The insurance policy taken by the assessee company in October, 2004 reflected value of hoardings at Rs. 5.20 crores. It was also pointed out that WDV of the predecessor cannot be taken as actual cost since under the Act, there is no such provision which deals with WDV of predecessor partnership firm as actual cost of the successor. The assessee while relying upon the decisions in the case of Kalooram Govindram v. CIT [1965] 57 ITR 335 (SC) and Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328 (PC) , contended that the purpose of transfer of assets and liabilities was not to claim more depreciation and reduce income-tax liability. However, the AO did not accept these submissions on the ground that main purpose of transfer was 'transfer of assets at enhanced value' so as to claim higher depreciation and thereby reduction in tax liability inter alia, the AO concluded :

(i) before revaluation/valuation the firm was having assets of Rs. 47.04 lacs as on 1st April, 2002 which on revaluation become Rs. 3.80 crores as on 31st March, 2003 and after the acquisition by the company these assets were valued at Rs. 9 crores, including hoardings of Rs. 4.77 crores, which were valued by the assessee company and not the firm.
(ii) Though the firm is in business for a considerable number of years, it was only in the year prior to acquisition by the assessee company that certain assets were revalued arbitrarily and shown as addition to block of assets and the revalued amount was not actual cost to the firm.
(iii) Hoarding boards never appeared in the schedule of fixed assets of the assessee firm nor these were treated as assets by the firm. In fact entire expenditure on hoardings was claimed as revenue expenditure by the firm. It was only the assessee company that valued the hoardings at Rs. 4,77,96,000 and claimed depreciation in order to reduce their tax liability.
(iv) Even though the firm valued the trade name at Rs. 3 crores during the financial year 2002-03, the schedule of fixed assets revealed opening balance of goodwill of Rs. 25,38,000 in the period relevant to asst. yr. 2003-04. The firm never claimed depreciation on trade name while the assessee company claimed depreciation @ 25 per cent considering the trade name as trade-mark. The assessee company claimed depreciation on trade name which is not at all a depreciable asset. There is no wear and tear of goodwill and trade name.
(v) the assessee has not given any basis for valuation/revaluation of assets by the firm or by the company,
(vi) the assessee claimed that it is a case of succession on going concern basis covered by provisions of s. 47( xiii) of the Act.

In view of the foregoing, the AO concluded that the assessee adopted a colourable device to reduce its income-tax liability by claiming higher depreciation with reference to enhanced cost of assets. The company created and valued an asset which was claimed entirely as revenue expenditure by the firm. Accordingly, having recourse to Expln. 3 to s. 43(1) of the Act and relying upon the decision in the case of McDowell & Co. Ltd. v . CTO [1985] 154 ITR 148 (SC) , the AO adopted WDV of assets of the company as on 1st April, 2003 same as in the case of firm as on 31st March, 2003, ignoring the arbitrarily valuation made by the assessee and the firm during the financial year 2002-03 Therefore, claim of depreciation was restricted to Rs. 14,11,910 as against claim of Rs. 2,11,28,649 made by the assessee in the asst. yr. 2004-05. Similarly in the asst. yr. 2005-06, claim of depreciation was restricted to Rs. 15,77,576 as against claim of Rs. 1,63,59,329 made by the assessee.

3. On appeal, the learned CIT(A) in his order for the asst. yr. 2004-05 concluded that :

"I have considered the rival submissions. It is observed that the basic issue involved in this case is whether the AO was right in invoking the provisions of Expln. 3 to s. 43(1) and if he acted reasonably in fixing the 'actual cost' for the said purposes. In this regard Expln. 3 to s. 43(1) is extracted below—

'Explanation 3 : Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case.'

The basic facts are that in the balance sheet of the erstwhile firm, the hoarding boards did not exist as one of the assets. However, the 'trade name' existed as an asset whose opening value was nil but which was revalued during the year at Rs. 3 crores so that on 31st March, 2003 the value was shown at Rs. 3 crores, implying that the firm had not claimed any depreciation on this asset w.e.f. 1st April, 2003, the appellant company took over the business of the firm on a going concern basis. The appellant has not denied that the hoarding boards did not exist as assets in the hands of the firm. It is only that the entire expenditure on them had been claimed as revenue expenditure. It follows that these assets were used by the firm for the purpose of business before the date of acquisition by the company. It is also an undisputed fact that the value of the hoarding boards which was nil in the hands of firm has been adopted at an enhanced value i.e., Rs. 4,77,96,000 on 1st April, 2003; an additional amount of Rs. 43,80,000 on 30th Sept., 2003 and Rs. 3,00,000 on 30th March, 2004 under the head 'Plant and machinery' in the hands of the appellant company. It is also an undisputed fact that the company has claimed depreciation on such enhanced values. In the background of these undisputed facts it is to be seen if the main purpose of the transfer of such assets, directly or indirectly to the appellant company was the reduction of liability to income-tax by claiming depreciation with reference to enhanced costs. The AO is of the view that the main purpose of transfer of assets was to reduce the liability to income-tax by claiming higher depreciation. The appellant has argued that the transfer of asset was purely a commercial transaction and the reduction of tax liability was incidental to such transaction and therefore it could not be said that the reduction of tax liability was the main purpose of transfer. The appellant has explained as to how in the changing economic scenario it took a pure commercial decision to bring into existence a corporate entity for greater acceptability, reliability and transparency. It has shown how the total turnover in the hands of firm at Rs. 8.17 crores for the year ending 31st March, 2003 increased to Rs. 11.20 crores, Rs. 13.35 crores and Rs. 13.87 crores progressively in three years in the hands of the company. The appellant has taken pains to point out that it has not adopted the enhanced value of the asset but fair market value of these assets as backed by the valuation report from the registered valuer. In short, the appellant has denied that behind the transfer of assets, the main purpose was reduction of tax liability by way of higher depreciation claim. It has therefore, argued that Expln. 3 to s. 43(1) does not apply in its case. In this regard it is observed that there is no doubt that against the nil value of the hoarding boards, the appellant has adopted a phenomenally higher value though labeled is as the market value. In Expln. 3 there is no such distinction envisaged or even intended. Call it by any name—market value, a higher value or real value the net effect is that it is an enhanced value/enhanced cost. Under the circumstances, it is held that it is a matter of fact that the appellant has adopted enhanced cost and has claimed depreciation with reference to such enhanced cost. It is undeniable that it has resulted in reduction of liability to pay income-tax. This fact is beyond any doubt or dispute. Thus, with all other requisite conditions of Expln. 3 standing fulfilled, what remains to be seen is if the reduction of the tax liability was the main purpose behind the transfer of assets. What if the appellant's argument that the claim of higher depreciation and reduction of tax liability was only incidental and not the main purpose is turned around to say that the commercial interest was only an intelligent facade to cover up the main purpose of gaining excess depreciation claim to the tune of Rs. 1,97,16,739. It is not to be missed that the increased tax liability on increased turnover in the hands of the company after the acquisition of assets (and liabilities) from the firm over the years would be greatly offset through claim of higher depreciation. Therefore, the appellant's plea of higher turnover in support of the transfer of assets as a pure commercial decision fails as a convincing argument. Under the circumstances; it is held that the AO had good reason to come to the reasonable belief that the main purpose of the transfer of such assets was to reduce the income-tax liability by claiming very high amount of depreciation on the enhanced cost of assets adopted by the appellant. Under the circumstances, he was fully justified in taking recourse to Expln. 3 to s. 43(1) of the Act and determining the actual cost of assets to the assessee with the previous approval of the Jt. CIT. It is a matter of record that the AO had obtained approval of the Addl. CIT for the said purpose. In this regard it is further observed that the actual cost of any particular asset to the assessee is entirely a question of fact to be determined with reference to the attendant material. In this behalf, the Madras High Court had observed in the case of CIT v . Harveys Ltd. [1940] 8 ITR 307 (Mad) that the mere production of documentary evidence showing that a contract was made for purchase of assets at a certain price does not conclusively establish the correctness of claim made by the assessee particularly where the AO is of the opinion that the deal was a colourable device to avoid tax. Under such circumstances the Andhra Pradesh High Court in the case of Kungundi Industrial Works ( P) Ltd. v . CIT [1965] 57 ITR 540 (AP) and the Calcutta High Court in the case of CIT v. Jogta Coal Co. Ltd. [1965] 55 ITR 89 (Cal) and the Supreme Court in the case of Guzdar Kajora Coal Mines Ltd. v . CIT [1972] 85 ITR 599 (SC) have upheld the action of the AO in going behind the contract and ascertain the actual cost for the purposes of correct ascertainment of income-tax liability. It is further observed that Expln. 3 does not speak of determination of market value of such assets by the AO. The AO is required to determine the actual cost for the said purpose. It is particularly noted that the AO has determined the actual cost of assets in this case being the original WDV of the assets in the hands of the firm including the hoarding boards and trade-mark. It is noted that the AO has recorded his satisfaction to the effect that the transfer of asset was a colourable device intended to reduce the liability to pay income-tax by claiming higher depreciation with reference to the enhanced cost of assets adopted by the appellant. Under the circumstances, the action of the AO in disallowing the excess claim of depreciation of Rs. 1,97,16,739 is upheld."

4. Relying on the aforesaid order, the learned CIT(A) disallowed a similar claim in the asst. yr. 2005-06 also.

5. At the outset, let us examine as to how the AO has completed the assessment relating to the asst. yr. 2004-05 which contains all the material particulars for taking decision in these two appeals. While arriving at a loss of Rs. 1,90,30,664 the company claimed depreciation amounting to Rs. 2,11,28,649 for the asst. yr. 2004-05. The gross value of assets as on 1st April, 2002 i.e., before revaluation/valuation by the firm, was about Rs. 47.04 lacs, which after valuation/revaluation becomes Rs. 3.80 crores as on 31st March, 2003. There were two partners in the said firm, Shri Atul K. Mehta and Shri Bakuleshbhai K. Mehta and all the assets and liabilities of the firm were taken over by the assessee company. Both the partners had been allotted shares in the company. Thus, the shareholders of the company were the partners of the firm. As per the depreciation chart given on p. 3 of the assessment order, the WDV of the assets of the firm as on 31st March, 2003, was Rs. 28,89,549. This included an amount of Rs. 14,94,779 minus depreciation @ 5 per cent thereon on account of revaluation of offices at Surat and Rajkot. No depreciation was claimed on valuation of trade name worth Rs. 3 crores by the firm. After the company had taken over the assets of the firm, the assessee company included the value of hoardings as on 1st April, 2003 at Rs. 4,77,96,000 made by an approved valuer in his report dt. 3rd Oct., 2004 and claimed depreciation on these hoardings. The AO came to the conclusion that the main purpose of transferring the assets and liabilities to the company was only with a view to reduce the liability to income-tax by claiming depreciation with reference to the enhanced cost of the company. Therefore, he took the view that Expln. 3 to s. 43(1) should be adopted. Accordingly the AO disallowed the claim for depreciation on Rs. 1,97,16,739 in the asst. yr. 2004-05. Likewise depreciation of Rs. 1,47,81,753 was disallowed in the asst. yr. 2005-06. The said Expln. 3 to s. 43(1) reads as follows :

"43. Definitions of certain terms relevant to income from profits and gains of business or profession.—In ss. 28 to 41 and in this section unless the context otherwise requires,—…………..

(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :………..

Explanation 3 : Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case."

What is "actual cost" contemplated under s. 43 ? It means the actual cost of the assets to the assessee, reduced by that portion of the cost met by any other person or authority directly or indirectly. The prefix 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 AO is satisfied that the main purpose of the transfer of the assets which were used by any other person at any time for the purpose of his business or profession, directly or indirectly to the assessee was the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. When the AO is so satisfied, he has wide discretion to fix the "actual cost" having regard to all the circumstances of the case subject to the previous approval of the Jt. CIT.

5.1 The Hon'ble apex Court in the case of Sunil Siddharthbhai v . CIT [1985] 156 ITR 509 (SC) , while considering a case of transfer of assets within the terms of s. 45 of the Act, laid down the scope of the powers of the AO and said : "he is entitled to penetrate the veil covering it and ascertain the truth". What is required to be examined is whether the transaction of creating the partnership is a genuine or a sham transaction and even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain.

5.2 Explanation 3 to s. 43(1) corresponds to s. 10(5)(a) of the 1922 Act. Sec. 10(5)(a) came up for interpretation before the Andhra Pradesh High Court in Kungundi Industrial Works (P) Ltd. v. CIT [1965] 57 ITR 540 (AP) . There the Court held to the following effect :

"that the increase in value of the assets was substantial and out of all proportion to the WDV in the hands of the previous assessee. The reasons advanced for the change-over did not justify the increase in value of assets. The main purpose of the change-over was therefore the reduction of liability to income-tax by claiming depreciation with reference to enhanced cost and the first proviso to s. 10(5)(a) would apply. The ITO had power to determine the actual cost of the assets with the previous approval of the IAC."

5.3 In the case under consideration, as is evident from the memorandum executed on 1st April, 2003, recording the transfer of entire business (pp. 59-72 of the paper book), the firm M/s Chitra Publicity Co. decided to sell their business as a going concern and the board of directors of the company in their meeting held on 25th March, 2003 discussed the feasibility of taking over the business as a going concern along with all the assets and liabilities as on 31st March, 2003 as per Sch. 1 attached to the memorandum. The said Sch. 1, has not been placed before us nor the details of liabilities taken over by the assessee company. It is further mentioned in the aforesaid memorandum that the assessee agreed to takeover all the liabilities whether or not recorded in the books i.e., all the assets and liabilities as on 1st April, 2003 and incurred before the date of sale. The relevant clauses on p. 4 of the said memorandum read as under :

"Whereas the assignor has transferred to the assignee and the assignee has taken over from the assignor as a going concern all the assets and liabilities of the assignor together with the stock-in-trade, equipment, furniture, fixtures fittings, outstandings, plant and machinery and vehicles of the business of the assignor as a going concern together with I he goodwill, trade name trade-mark, know-how of the said business as registered in India for a consideration of Rs. 8,00,00,000 (rupees eight crores only) and

Whereas the assignor has in pursuance of but prior to the execution of these presents delivered to the assignee all the said plant and machinery, furniture, stock-in-trade and other articles and things as are of the nature of movable property and capable of passing by manual delivery against payment of the price as determined by various assets payable by the assignee to the assignor ; and

Whereas the assignee has now requested the assignor to record the memorandum of transfer of all the assets and liabilities of the assignor, whatever and more particularly specified in the balance sheet as at 31st March, 2003 prepared by it without derogating from the generality of the foregoing in particular—

(a) All the rights to the business and to continue to carry on such business including and together with the goodwill of the assignor in respect of the above business of the assignor.
(b) All the assets of the business and all the rights (including lease hold rights) to assets including immovable, fixed, movable, actionable claims and other assets of whatever nature.
(c) All the trade name, trade-marks, permits and licenses goodwill and know-how attached to the business carried on in India by using trademarks including advantage, benefits of the power connection, equipment, furniture and fittings, office equipment, telephones vehicles and all stock-in-trade and all other assets whatsoever of the assignor connected with the business of the assignor and the right to obtain licenses, entitlements and other quotas and registrations with all Government, municipal and other authorities and industrial licenses if any to carry on the business."

5.3.1 In terms of the aforesaid clauses in the memorandum, the firm transferred the business as a going concern carried on by the firm at their premises situate in Ahmedabad, Baroda, Surat and Rajkot for a consideration of Rs. 8 crores in the form of 50,00,000 equity shares of the value of Rs. 10 per share at a premium of Rs. 6 per share to the assessee company. Though the memorandum specifies the Sch. 1 mentioning goodwill/trade-marks trade names, know-how and all the assets, rights, obligation and liabilities in India, the said schedule or the basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark, have not been placed before us. The said memorandum was signed by Shri Bakulesh Mehta and Shri Atul Mehta both on behalf of the firm as well as the company. As is apparent from the memorandum and facts narrated before us, the partners of the firm constituted themselves into a private limited company. The shareholders of the company were the old partners. Only after the purchase of the business of the firm, the company ascertained the fair market value of the hoardings received from the firm at Rs. 4,77,96,000 as on 1st April, 2003 as per report dt. 3rd Oct., 2004 of the approved valuer while their WDV in the hands of the firm was nil, the entire expenditure having been claimed as revenue expenditure. The firm considered the prospects and advisability of continuing to carry on business and for various unspecified reasons for the sale of their business as a going concern. The company claimed depreciation allowance on the hoardings on the basis of their enhanced value. In fact, as per depreciation chart annexed with the tax audit report for the financial year ending 31st March, 2003, the said firm claimed depreciation of only Rs. 3,68,585 on their assets. The relevant details of various assets are reflected on p. 3 of the assessment order. In the balance sheet of the firm as on 31st March, 2003. The said firm revalued some of the assets like land, Rajkot office, Surat office and also created another asset i.e., trade name of the value of Rs. 3 crores. In the schedule of fixed assets of the firm, the assessee reflected opening balance of Rs. 25,38,000 on account of goodwill, on which no depreciation had been claimed nor on the trade name. The firm had claimed entire expenditure on construction of hoardings as revenue expenditure and thus, hoardings were never shown as part of their fixed assets. However, the company in their computation of depreciation, as reproduced on p. 2 of the assessment order, had addition of Rs. 4,77,96,000 as on 1st April, 2003 on account of hoardings under the head plant and machinery. These hoardings do not find place either in the memorandum of transfer of assets placed in the paper book nor appeared in the balance sheet of the firm after more than one and a half year, the assessee company got ascertained the fair market value of these hoardings as on 1st April, 2003 at Rs. 4,77,96,000 and claimed depreciation on these hoardings @ 25 per cent. The report dt. 3rd Oct., 2004 of the valuer Induprasad C. Patil is placed at pp. 89 to 123 of the paper book. In the light of these facts, the AO and the learned CIT(A) concluded that the assessee was not entitled to depreciation on these hoardings in view of provisions of Expln. 3 to s. 43(1) of the Act. The question then in these circumstances is whether the main purpose for the transfer of assets to the assessee was directly or indirectly the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. If that be inferred from the circumstances the matter would be governed by the provisions of Expln. 3 to s. 43(1) of the Act. It must be borne in mind that for the application of the said Explanation that need not be the only reason for the transfer of assets. There may be other reasons also but the main purpose should be the reduction of liability to income-tax directly or indirectly by claiming depreciation on enhanced value. Before us, the learned Authorised Representative on behalf of the assessee vehemently argued that main purpose of transfer of assets was commercial and not reduction in tax liability and further stated that on purchase of assets by the company, turnover had increased substantially. The reasons for increase in turnover may be manifold and neither the assessee placed any material before the lower authorities for ascertaining the reasons for increase in turnover nor the lower authorities have gone into this aspect. Even before us, no such material has been placed. The corporatisation of the firm may also be a reason, as contended by the learned Authorised Representative but the facts in the case under consideration relating to claim of depreciation on the enhanced value of hoardings, which did not even appear in the balance sheet of the firm or in the memorandum of transfer, point out that main purpose was nothing but reduction in tax liability. It is not understood as to when the aforesaid two persons while being partners in the firm thought it commercially prudent to claim the expenditure on hoardings as revenue expenditure, the same two persons while being fully aware that hoardings were not fixed assets of the firm, on becoming directors of the company, got valued these hoardings after about one and a half year of the purchase of business and claimed the same to be plant and machinery for claiming depreciation. In these circumstances, what can be the purpose if not reduction in tax liability by claiming depreciation on an enhanced value. Apparently, the increase in value of the hoardings is substantial and out of all proportion to their WDV in the hands of the firm. The reasons advanced for the transfer of hoardings do not justify the increase in their values. There is no separate mention of these hoardings at all in the memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings. In the light of these facts, I am of the opinion that the main purpose of the transfer of hoardings was, therefore, the reduction of liability to income-tax by claiming depreciation with reference to enhanced value and the Expln. 3 to s. 43(1) of the Act would apply.

5.4 Moreover, the depreciation under s. 32 of the Act is calculated either on the actual cost or on the WDV. Before us, there is nothing to suggest that the aforesaid amount of Rs. 8 crores mentioned in the memorandum of transfer, includes an amount of Rs. 4,77,96,000 towards acquisition of hoardings. Admittedly the revaluation of the hoardings was done by the assessee company and not the firm. As already stated, the firm only revalued their land account as also Rajkot and Surat offices apart from valuing trade name. The WDV of the hoardings in the books of account of the firm is nil as on 31st March, 2003. In the accounts of the firm net assets as on 1st April, 2003, as a result of sale, have been shown as under :

There is no mention of hoardings in the fixed assets nor any evidence that any amount has been paid toward acquisition of hoardings. No doubt the firm and partners being commercial men would value the assets only on a real basis and not at cost or at their other value appearing in the books. In the present case, the AO adopted Expln. 3 to s. 43(1) when he sufficiently saw that after effecting the transfer there was a direct or indirect attempt to reduce the liability to income-tax the value of the hoardings having already been claimed by the firm as revenue expenditure and no mention thereof having been made either in the balance sheet of the firm as on 31st March, 2003 while Sch. 1 referred to in the memorandum having been not placed before us. There was nothing to suggest that the amount of Rs. 4,77,96,000 was actual cost of the assets to the assessee. The purpose of the said Expln. 3 is to cover all such contingencies and in that view wide powers are conferred on the AO. In the present case in fact, the AO did it successfully obviating all collusive device in effecting the transaction though it cannot reasonably be said as the sole purpose of the transaction. The definition of "actual cost" contained in s. 43(1) read with the Explanations thereto affords a mechanism by which to reduce the actual cost to a figure which is anything but real. When the asset was formerly used by any other person for the purposes 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 AO in the exercise of the power conferred on him as prescribed in Expln. 3 to s. 43(1). In the case under consideration, admittedly hoardings were being used by the firm and the entire expenditure having already been claimed as revenue, these hoardings did not appear in the balance sheet of the firm as on 31st March, 2003. Even no mention is made of hoardings in the memorandum of transfer of business along with assets and liabilities. Since these hoardings were part of the business of the firm, which the assessee received on sale by the firm, the assessee company got these valued and their fair market value as on 1st April, 2003 was determined at Rs. 4,77,96,000. Is this actual cost to the assessee ? There is no basis before us for fixing the consideration of Rs. 8 crores nor Sch. 1 referred to in the memorandum has been placed before us. Why would a company pay Rs. 4,77,96,000 (determined only on 3rd Oct., 2004) for hoardings whose cost is nil in the balance sheet of the firm as on 31st March, 2003 the entire expenditure having already been claimed as revenue expenditure. There is no apparent reason except to claim depreciation on such hoardings and to reduce their tax liability.

5.5Ginners & Pressers (P) Ltd. v. CIT [1978] 113 ITR 616 (Bom) , was a case where s. 10(5)(a) of the 1922 Act corresponding to Expln. 3 to s. 43(1) of the present Act came up for discussion. The facts of that case narrated hereunder are more or less similar to the facts on hand. The assessee, a private limited company, was a subsidiary of another private limited company. The object of formation of the assessee company was to takeover some oil and ginning mills, factories and land belonging to and used in its business by the parent company. These assets were taken over by the assessee company at a cost of Rs. 13,50,000. Their WDV for the parent company was only Rs. 2,21,412 while their original purchase cost to the parent company was Rs. 5,52,475. The assessee paid for the assets by issuing fully paid-up shares of that value. The ITO applied the proviso to s. 10(5)(a) and, with the previous approval of the IAC, he fixed the actual cost of the assets to the assessee at their WDV in the books of the transferor plus the balancing charge arising under s. 10(2)(vii). The Tribunal rejected the contention of the assessee that the assets had been transferred to the assessee by the parent company after they had been got valued by valuers because the material on the basis of which the value had been fixed by the valuers for the assets in question had been withheld by the witness who was examined on behalf of the valuers before the ITO and the non-production of such material led to an adverse inference being drawn against the assessee-company. On these facts two questions arose for consideration before the High Court on reference. The first question is whether the proviso to s. 10(5)(a ) has been properly applied and the second question is whether the Tribunal is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the Court found that the condition for attracting the proviso to s. 10(5)(a ) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee company. On the second question the Court found that the Tribunal was justified in rejecting the valuation report and drawing an adverse inference against the assessee. The first question alone is relevant in the present case and on that question the Court said that the ITO proceeded to fix or determine the actual cost (WDV) of the assets transferred by adopting the WDV of those assets transferred in the books of the transferor of the assessee-company as on the date of transfer and added to that figure the balancing charge arising under s. 10(2)(vii) of the Act. The Hon'ble High Court further observed :

"It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferor company as on the date of transfer, and we do not see any reason why if the same value is taken to be the actual cost to the transferee company, as on the date of transfer, the determination would be irrational or unreasonable. If the ITO adopted this method of determining the actual cost of the transferred assets with the approval of the IAC it will be difficult to say that the method adopted was unreasonable or irrational."

5.6 It is well-settled position that the Courts/ITOs are entitled to lift the veil of the corporate entity and pay regard to the realities. They have power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation, [see Firestone Tyre & Rubber Co. Ltd. v. Lewellin (Inspector of Taxes) [1958] 33 ITR 741 (HL) ]. In CIT v . Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) , the Hon'ble Supreme Court said that the IT authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction, it further said :

"It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard the economic realities behind the legal facade."

5.6.1 In B.M. Kharwar (supra), the Hon'ble Supreme Court has held that the taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. In the decision reported in Juggilal Kamlapat v . CIT [1969] 73 ITR 702 (SC) , the Supreme Court has held the corporation may be a legal personality distinct from its members. But, the Court is entitled to lift the mask of corporate entity if the conception is used for tax evasion, or to circumvent tax obligation or to perpetrate a fraud.

6. As regards reliance on the decision of the Hon'ble Gujarat High Court in the case of Ashwin Vanaspati Industries (supra). I am of the opinion that facts in the cited case are quite at variance with the facts in the case under consideration, as revealed from the following distinguishing features :

In the light of aforesaid distinguishing features and due regards to the decision of Hon'ble jurisdictional High Court. I am of the opinion that the aforesaid decision relied upon by the assessee and the learned JM is not applicable to the facts of the case under consideration.

6.1 The other two decisions relied upon on behalf of the assessee in the case of CIT v . Sekar Offset Press [1995] 214 ITR 516 (Mad) and Unimed Technologies Ltd. (supra) were rendered on their own peculiar facts. The learned Authorised Representative on behalf of the assessee has not demonstrated before us as to how these decisions are applicable to the facts of the case under consideration.

6.2 In this context Hon'ble Supreme Court cautioned in their recent decision dt. 6th March, 2009 in the case of State of Andhra Pradesh v . M. Radha Krishna Murthy (Criminal Appeal No. 386 of 2002) :

"6. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's, theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated judgments of Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions but the discussion is meant to explain and not to define Judges interpret statutes they do not interpret judgments. They interpret words of statutes, their words are not to be interpreted as statutes………

8. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases disposal of cases by blindly placing reliance on a decision is not proper.

9. The following words of Lord Denning in the matter of applying precedents have become locus classicus :

'Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.'

……………

'Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it'."

6.3 In the light of aforesaid observations of the Hon'ble apex Court, I am of the view that reliance on the aforesaid decisions in the case of Ashwin Vanaspati Industries (supra), Sekar Offset Press (supra) and Unimed Technologies Ltd. ( supra), rendered on a different set of facts, is totally misplaced.

7. In view of the foregoing, it cannot be said that the AO or the learned CIT(A) have acted unreasonably or arbitrarily in adopting Expln. 3 to s. 43(1) of the Act and denying the depreciation on the hoardings valued by the assessee accordingly. Therefore, grounds raised by the assessee in respect of their claim for depreciation on hoardings in these two assessment years, are dismissed.

8. As regards claim of depreciation on trade name valued by the firm at Rs. 3 crores. AO found that even though firm valued the trade name at Rs. 3 crores, it did not claim depreciation. There is nothing in the impugned orders suggesting the basis for valuation of trade name by the firm nor the assessee placed before us the relevant Sch. 1 referred to in the memorandum of the valuation report, so as to ascertain the actual cost to the assessee. We find that the AO treated the trade name as goodwill and disallowed the claim for depreciation. Though the assessee in their ground No. 2 of the appeal has raised an alternate ground that the differential amount may be treated as goodwill and depreciation allowed accordingly, in fact, this ground was not pressed before us and no submissions have been made as to how the amount can be treated as goodwill, entitled to depreciation. The learned CIT(A) without ascertaining either basis of valuation of trade name or as to whether or not it is of the nature of goodwill or trade-mark, dismissed the claim of the assessee, invoking the provisions of Expln. 3 to s. 43(1) of the Act. I am of the opinion that impugned order of the learned CIT(A) is not a speaking order on this aspect. Before us though the learned Authorised Representative referred to their submissions on p. 42 of the paper book wherein report of some registered valuer is referred to, a copy of the said report though referred to in the said submissions has not been placed either in the paper book nor submitted before us. Even the basis of valuation is neither evident from the impugned orders of the AO or the learned CIT(A) nor the learned Authorised Representative enlightened us on this aspect. In the absence of any findings by the learned CIT(A) as to whether or not trade name is goodwill and in the absence of basis of valuation of the said trade name, especially when the assessee did not place relevant Sch. 1, to the memorandum before us. I consider it fair and proper to restore the matter to the file of the learned CIT(A) with the directions to readjudicate the claim of depreciation on the amount attributed to trademark, in accordance with law after allowing sufficient opportunity to the both parties and keeping in view my aforesaid observations as also various judicial pronouncements on the issue. Inter alia it may be kept in view as to whether or not the assessee claimed any depreciation on the amount of goodwill reflected by the firm in their books and purchased by the assessee.

9. Likewise the learned CIT(A) has not recorded any findings on the claim of depreciation on other assets valued by the firm viz. buildings at Rajkot and Surat nor copies of relevant valuation reports or basis of valuation by the firm have been placed before us in my view, the order of the learned CIT(A) speaking order on this issue. In the absence of specific findings by the learned CIT(A) on the claim for depreciation on enhanced value of buildings at Rajkot and Surat and in the absence of basis of valuation of the said buildings, especially when the assessee did not place relevant Sch. 1 to the memorandum before us. I consider it fair and proper to restore the matter to the file of the learned CIT(A) with the directions to readjudicate the claim of depreciation on the enhanced value of the aforesaid buildings, in accordance with law after allowing sufficient opportunity to the both parties and keeping in view my aforesaid observations.

10. Subject to aforesaid directions in relation to claim of depreciation on the amount attributed to trade-mark and enhanced value of the buildings, grounds relating to claim of depreciation on the hoardings valued by the assessee, are dismissed.

11. In the result, both these appeals are partly allowed for statistical purposes.

REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961

3rd Aug., 2009

As there is a difference of opinion, the matter is being referred to the Hon'ble President, Tribunal, with a request that following questions may be referred to a Third Member or pass such order as the President may deem fit :

"(1) Whether on the facts and circumstances of the case, the assessee is entitled to depreciation in the asst. yrs. 2004-05 and 2005-06 on the following assets—

I.Hoardings valued by the assessee on 1st April, 2003 at Rs. 4,77,96,000,

II.Trade name valued by the firm at Rs. 3,00,00,000 and

III.Addition to the buildings on account of valuation by the firm of—

Vimal Gandhi, President (As Third Member) :26th Oct., 2009

On account of difference between the learned Members of Ahmedabad 'B' Bench of Tribunal, the following questions have been referred, under s. 255(4) of the IT Act :

"(1) Whether on the facts and circumstances of the case, the assessee is entitled to depreciation in the asst. yrs. 2004-05 and 2005-06 on the following assets :

(i)Hoardings valued by the assessee on 1st April, 2003 at Rs. 4,77,96,000 ;

(ii)Trade name valued by the firm at Rs. 3,00,00,000 ; and

(iii)Addition to the buildings on account of valuation by the firm of—

a) (Rajkot office : Rs. 3,99,317 and
(b) Surat office : Rs. 10,95,462."

(The learned AM has remanded the matter for reconsideration of "actual cost" fixed in respect of assets at serial Nos. (ii) and (iii) and therefore, parties wanted to modify the question. This matter would be considered at the end).

2. The controversy which led to the above differences is on depreciation of Rs. 1.97 crores and Rs. 1.47 crores for the asst. yrs. 2004-05 and 2005-06 respectively claimed by the assessee on revalued assets and disallowed under s. 43(1), Expln. 3 of the Act by taking "actual cost" of assets in the hands of the assessee company.

2.1 To resolve the above differences, the case was fixed for hearing and I have heard Shri B.S. Gehlot, learned CIT-Departmental Representative, as Departmental Representative and Shri S.N. Soparkar, senior advocate, the learned counsel for the assessee. As noted above, the controversy involved in the appeals relates to application of Expln. 3 to s. 43(1) of the IT Act.

3. The facts of the case briefly stated are that firm named M/s Chitra Publicity Company with two partners namely Shri Atul K. Mehta and Shri Bakuleshbhai K. Mehta, having equal shares, was carrying on advertisement business for several decades. Above running business was taken over by the assessee company w.e.f. 1st April, 2003 as per memorandum of even date for a total consideration of Rs. 8 crores. Two erstwhile partners became sole shareholders of the assessee company. As per the assessee, out of the consideration, the assessee paid specified sums for the following assets :

3.1 In its return, assessee claimed depreciation on various assets including 3 assets with value (cost) referred to above. Total depreciation was claimed at Rs. 1,97,16,739 for the asst. yr. 2004-05 in the first year of assessment of the assessee company. The . AO held that the depreciation was claimed on enhanced cost of above assets and therefore, in the light of provisions of Expln. 3 to s. 43(1) of the Act, which he invoked, actual cost of two assets in the hands of the assessee was taken at 'nil. In the case of third asset 'buildings', WDV as reflected in the hands of the firm in the immediately preceding year was adopted as cost. Depreciation was accordingly worked out and disallowance of Rs. 1.97 crores was made. On the same basis in the next year 2005-06, a sum of Rs. 1.47 crores was disallowed.

4. The assessee being aggrieved, challenged above action of the AO in appeal before the CIT(A) but remained unsuccessful. The learned CIT(A), after detailed discussion, upheld the action of the AO. The assessee, therefore, approached the Tribunal in appeal.

5. After hearing submissions of the learned representatives, the Members of the Bench could not arrive at an agreed conclusion and expressed dissenting views in their proposed orders. The learned JM, in his order, accepted the claim made by the assessee which was allowed. The learned AM, on the other hand, held that Expln. 3 to s. 43(1) was rightly applied by the Revenue authorities. He upheld the cost of hoarding determined by the AO and confirmed on appeal. However, in respect of cost of goodwill, and buildings at Rajkot and Surat, the matter was remitted to the AO for redetermination of cost in the light of his directions.

6. I have carefully considered submissions of the parties including written synopsis sent by the learned Departmental Representative and examined facts available on record. There is no major difference on facts involved, except on production of valuation reports before the AO. I, therefore, deem it unnecessary to reproduce detailed facts of the case or details of proceedings before Revenue authorities. In spite of hard labour put in by the learned Departmental Representative in oral or written submissions, I am of the view that the Revenue has not made any case. The disallowances made under Expln. 3 to s. 43(1) are totally unjustified. The learned JM in the proposed order has correctly analyzed and narrated facts of the case and that of the case of Ashwin Vanaspati Industries v . CIT [2002] 255 ITR 26 (Guj) and rightly held that the matter is fully covered by the binding decision of the jurisdictional High Court. I agree with the order proposed by him. Hereinbelow, I record my reasons for adopting the above course.

6.1 At the very outset, I wish to state that notwithstanding rule of harmonious construction and reading of entire statute, different legislative policies are incorporated in different sections of the IT Act and unless there is explicit or clearly implied intent, policy of one section is not to be read or applied in the other section. For example as per the policy, provisions of capital gains are attracted on "transfer" of a capital asset. However, under s. 47(xiii) of the Act, change of ownership of capital asset is not treated as 'transfer' for purposes of capital gain. But it cannot follow that for all other provisions of the Act, such change of ownership is to be ignored by reading s. 47(xiii) in those sections. Legislative intent, purpose, language of each section is to be kept in mind while considering its applicability. Again under Expln. 2 to s. 43(6)(c ) of the Act, in case of transfer of assets on amalgamation of companies, the WDV of the transferred assets is to be carried forward and depreciation is to be allowed on such WDV and not on cost. However, application of above provision is to be restricted to the cases stated in the provision. General and unauthorized application of above provision is not permissible. Likewise purpose of Expln. 3 to s. 43(1) is clear from its plain language and there is no need to engraft other provisions to achieve its purpose. The provision is complete and self-contained.

7. Explanation 3 to s. 43(1), which is subject-matter of controversy, is as under :

"Explanation 3 : Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case."

7.1 It is clear from above that the above Explanation, stipulates the following circumstances be satisfied and steps taken :

(i) Before the date of acquisition of the assets by the assessee, such assets were, at any time, used by any other person for purposes of his business or profession.
(ii) The AC) is satisfied that main purpose of transfer of such assets, directly or indirectly, to the assessee was the reduction of liability to income-tax by claiming depreciation with reference to enhanced cost.
(iii) If above two circumstances arc satisfied, then AC) may determine "actual cost" to the assessee having regard to all the circumstances of the case.
(iv) That aforesaid cost is to be determined with the previous approval of the Jt. CIT.

8. The circumstances/ conditions at serial Nos. (i) and (ii) above do not need much elaboration although in my view the circumstance at serial No. (ii) has close connection with No. (iii) particularly on the facts of these cases. The controversy is generally as to how "actual cost" is to be determined having regard to the circumstances of the case.

9. There is no dispute that firm was using three assets for purposes of business and, therefore, circumstance No. (i) above is applicable. The second circumstance relating to satisfaction of the AO on the main purpose of transfer of assets being reduction of liability to income-tax has been challenged by the assessee and this objection has been accepted by learned JM. There is considerable emphasis and elaboration in the proposed order of the learned AM and according to him satisfaction in terms of Expln. 3 on facts has been rightly recorded. It was also highlighted by Shri Gehlot, during the course of the hearing. Shri Soparkar, the learned senior counsel for the assessee, on the other hand, contended that apart from getting higher depreciation, the takeover of the business by the corporate body was a measure of commercial expediency. It was argued that in the light of globalization and industrialization, many foreign concerns were approaching Indian concerns to have a joint venture. These foreign concerns were not prepared to have any business or joint venture with a firm. Only a corporate body could have a foreign collaboration. He referred to Circular No. 772, dt. 23rd Dec, 1998 [ [1999 ] 151 CTR (St) 9] of CBDT wherein incorporation of limited companies has been encouraged by the Government. He also drew my attention to an offer from News Outdoor Group dt. 28th July, 2006, a foreign company interested in acquiring majority interest in the assessee company. It was accordingly contended that AO, in the present case, could not record his satisfaction or hold that the main purpose of transfer of assets in question was reduction of liability to income-tax. Benefit of higher depreciation was only incidental and not main purpose of acquisition of assets by the company. Shri Soparkar also argued that after the business was taken over by the assessee company, there was much improvement in the turnover. He drew my attention to increase in figure of turnover of the assessee in the subsequent years. Accordingly it was contended that purpose of taking over of business by the corporation was to run it more effectively and efficiently, which was clear from the results shown in the subsequent years.

10. I have carefully considered above submissions. It appears to me that objection on satisfaction raised by the learned counsel for the assessee have been met by the Revenue authorities and in the proposed order by the learned AM. However in the light of the views taken hereinafter, I do not feel it necessary to record any final finding on this aspect. I 'presume' that satisfaction as envisaged by the Expln. 3 above could be and has been recorded. I have deliberately used the word 'presumed' as purpose of the statutory provision, in my view, can be achieved only if actual cost is "determined" as per law. Recording of satisfaction on the main purpose of transfer of assets is no doubt important. It is like laying of foundation from which proceeding to determine "actual cost" is to be launched. If actual cost is not determined as required by the statutory provision, recording of "satisfaction" would not serve any useful purpose. The Hon'ble jurisdictional High Court in the case of Ashwin Vanaspati Industries (supra) also considered circumstances/condition Nos. (ii) and (iii) together for application of the Explanation.

10.1 Accordingly, I proceed to consider the question whether the AO has rightly determined "actual cost" of three assets to the assessee, having regard to all the facts and circumstances of the case. Such actual cost of hoarding as an asset has been determined at 'nil' because firm deducted cost of hoardings as a revenue expenditure and did not show hoardings as an asset in its record (balance sheet). On goodwill also no depreciation has been allowed and its cost has been taken at nil mainly on the basis of non-claim of depreciation by the erstwhile firm and other treatment given to this asset. Actual cost of buildings at Rajkot and Surat was adopted at WDV of buildings as if these continued to be owned by the firm. Claim of depreciation at figures quoted above was disallowed.

10.2 The reason for disallowance of depreciation and justification for the substitution of nil cost or the WDV of assets as actual cost in the orders of Revenue authorities and in the proposed order of learned AM as also in the submissions of the learned Departmental Representative, may be summarized as under :

(a) AO's reasonings as summaried by the learned AM in his proposed order are as under :

"(i) before revaluation/valuation, the firm was having assets of Rs. 47.04 lacs as on 1st April, 2002 which on revaluation became Rs. 3.80 crores as on 31st March, 2003 and after the acquisition by the company these assets were valued at Rs. 9 crores including hoardings of Rs. 4.77 crores, which were valued by the assessee company and not the firm.
(ii) Though the firm is in business for a considerable number of years, it was only in the year prior to acquisition by the assessee company that certain assets were revalued arbitrarily and shown as addition to block of assets and the revalued amount was not actual cost to the firm.
(iii) hoarding boards never appeared in the schedule of fixed assets of the assessee firm nor these were treated as assets by the firm. In fact entire expenditure on hoardings was claimed as revenue expenditure by the firm. It was only the assessee company that valued the hoardings at Rs. 4,77,96,000 and claimed depreciation in order to reduce their tax liability.
(iv) Even though the firm valued the trade name at Rs. 3 crores during the financial year 2002-03 the schedule of fixed assets revealed opening balance of goodwill of Rs. 25,38,000 in the period relevant to asst. yr. 2003-04. The firm never claimed depreciation on trade name while the assessee company claimed depreciation @ 25 per cent considering the trade name as trade-mark. The assessee company claimed depreciation on trade name which is not at all a depreciable asset. There is no wear and tear of goodwill and trade name.
(v) the assessee has not given any basis for valuation/revaluation of assets by the firm or by the company.
(vi) the assessee claimed that it is a case of succession on going concern basis covered by provisions of s. 47( xiii) of the Act. The claim of depreciation was restricted to Rs. 14,11,910 as against claim of Rs. 2,11,28.649 made by the assessee in the asst. yr. 2004-05. Similarly in the asst. yr. 2005-06, claim of depreciation was restricted to Rs. 15,77,576 as against claim of Rs. 1,63,59,329 made by the assessee."

Similar disallowance was made in asst. yr. 2005-06.

(b) That hoarding boards were not part of fixed assets of the firm in the balance sheet as on 31st March, 2003 and the cost of hoarding was deducted as revenue expenditure by the firm yet transferred to the assessee company at Rs. 4,77,96,000 as on 1st April, 2003. Valuation of these assets shows arbitrariness and no basis. This was done with a view to claim higher depreciation.
(c) In the year of the acquisition, assets were arbitrarily revalued and transferred at enhanced value. This exercise as a colourable device was undertaken to increase closing WDV of the firm.
(d) In fact actual cost concept was violated by the firm in claiming depreciation thereon. The whole exercise of transfer of assets and of liability suffer from several contradictions and arbitrariness.
(e) The opening balance of trade name, goodwill was shown at Rs. 25,38,000 whereas it was valued at Rs. 3 crores during the financial year 2002-03 and was shown as addition to asset during the financial year 2002-03. The firm did not claim depreciation on trade name during the asst. yr. 2003-04. The assessee company had claimed depreciation @ 25 per cent taking opening WDV at Rs. 3 crores including the value of trademark. As per AO, no depreciation under s. 32 is permissible on trade name or goodwill. The trade name was an appreciable asset whereas assessee has claimed depreciation in respect of the trade name.
(f) Under proviso ( c) to s. 47( xiii), the partner of firm does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. However, assessee company has arbitrarily valued and revalued assets. The firm has not been taxed in view of s. 47( xiii) while assessee has claimed depreciation with reference to arbitrarily enhanced cost of assets.
(g) The closing WDV of the erstwhile firm is taken as actual cost, in place of arbitrary valuation/revaluation fixed by the erstwhile partnership firm during the financial year 2002-03 and the assessee were ignored.
(h) The claim of depreciation on such revalued asset by the firm was also against actual cost concept. The trade name and goodwill are like land and are not appreciable assets ; that is why no depreciation is allowable in respect of such assets.
(i) The AO further observed that the assets of the firm have been revalued and corresponding capital of the partner has been increased without any reflection on the profitability of the firm. He referred to proviso ( c) to s. 47( xiii) of the Act.
(j) As against nil value of hoarding board, the appellant has adopted a phenomenal higher value though labeled it as market value. In Expln. 3 there is no such distinction envisaged or even intended. Call it by any name—market value, a higher value or a real value—the net effect is that it is an enhanced value/enhance cost. On account of enhanced cost and has claimed depreciation with reference to such enhanced cost, which has resulted in reduction of liability to pay income-tax.
(k) The appellant's plea of higher turnover in support of transfer of assts as a pure commercial decision fails as a convincing argument.

11. In the appellate order for asst. yr. 2005-06, the learned CIT(A) has observed as under :

"For working out this sale consideration, value of hoardings was taken at Rs. 4,77,96,000 out of the total net value of assets of the partnership firm at Rs. 8,25,01,768. This value of hoardings of Rs. 4,77,96,000 as on 1st April, 2003 was same as the value determined by the registered valuer. It is further seen that while the memorandum was signed on 1st April, 2003, the registered valuer, namely, Mr. Induprasad C. Patel's valuation report determining the value of hoardings as on 1st April, 2003 is dt. 3rd Oct., 2004. The same is available on pp. 89 to 123 of the paper book filed during the appeal proceedings for asst. yr. 2004-05. How the appellant could adopt identical value of the hoardings at the time of signing of memorandum of transfer on 1st April, 2003, when the registered valuer determined this value on 3rd Oct., 2004 is not clear. The total number of hoardings is about 2,100 for various places all over Gujarat and there is no way that the appellant or the erstwhile firm could have known the identical value on 1st April, 2003, which the registered valuer determined on 3rd Oct., 2004. The only reasonable inference could be that the registered valuer's report was got prepared to suit appellant's own requirements."

Observations of the learned AM, in the proposed order(in brief).

(l) In the light of the decision of Sunil Siddharthbhai v . CIT [1985] 156 ITR 509 (SC), the learned AM quotes that "AO is entitled to penetrate the veil covering it and ascertain the true value". The transaction of transfer is genuine or sham is required to be examined.
(m) The assessee has not placed before the Tribunal Sch. 1 to the memorandum dt. 1st April, 2003 nor the details of liabilities taken over have been furnished. However, in the memorandum, it is stated that all the assets and liabilities as on 1st April, 2003 are agreed to be taken over.
(n) The assessee appellant has not furnished basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark before the Tribunal.
(o) Only after the purchase of business of the firm as a going concern, the company ascertained the fair market value of the hoardings received from the firm at Rs. 4,77,96,000 as on 1st April, 2003 as per report dt. 3rd Oct., 2004 of the approved valuer, while their WDV in the hands of the firm was nil. The entire expenditure having been claimed as revenue expenditure.
(p) Besides reduction of liability to income-tax by claiming that depreciation on enhanced cost, there may be other reasons also but main purpose was reduction of liability to income-tax.
(q) The reasons for increase in turnover may be manifold and the assessee did not place any material before the lower authorities for ascertaining the reason for increase in turnover nor the lower authorities have gone into this aspect. No material has been placed before us (Tribunal).
(r) It is not understood as to when the aforesaid two persons (partners) while being fully aware that hoardings were not fixed assets of the firm, on becoming directors of the company got valued these hoardings after about one and a half year of the purchase of business and claimed the same to be plant and machinery for claiming depreciation. What can be the purpose, if not reduction in tax liability.
(s) Apparently the increase in the value of hoarding is substantial and out of proportion to their WDV in the hands of the firm.
(t) There is no mention of these hoardings at all in the memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings.
(u) Under s. 32 of the Act, depreciation is calculated either on actual cost or on WDV. Before us, there is nothing to suggest that aforesaid amount of Rs. 8 crores mentioned in the memorandum of transfer included an amount of Rs. 4,77,96,000 towards acquisition of hoardings. There is further nothing to suggest that the amount of Rs. 4,77,96,000 was actual cost of assets to the assessee.
(v) Under Expln. 3, wide powers are conferred on the AO to cover contingencies mentioned therein.
(w) In the present case, the AO did successfully obviating all collusive devices in effecting the transaction, though it cannot reasonably be said as a sole purpose of the transaction.
(x) The definition of "actual cost" contained in s. 43(1) affords a mechanism to reduce the actual cost to a figure which is anything but real.
(y) Rs. 4,77,96,000 is actual cost to the assessee. There is no basis before us for fixing the consideration at Rs. 8 crores. Schedule 1 referred to in the memorandum has been placed before us. Why would a company pay Rs. 4,77,96,000 for hoardings whose cost is nil in the balance sheet of the firm as on 31st March, 2003, the entire expenditure having been claimed as revenue.

11.1 The learned AM has also mentioned points to distinguish case of Ashwin Vanaspati Industries (supra) and held the same to be not applicable to the facts as in that case, liabilities of business were not taken over by the company. Contextual interpretation is required to be applied. In respect of depreciation on buildings at Rajkot and Surat. The learned Departmental Representative placed reliance on the order of AO/CIT(A) to justify adoption of WDV claimed as a correct method. It was argued that in the case of Ashwin Vanaspati Industries (supra), it has been held that Expln. 3 to s. 43(1) does not require determination of market value by the AO but actual cost.

11.2 In the valuation report, the registered valuer determined market value and not actual cost. Therefore, report of the registered valuer could not be relied upon.

12. Before adverting to application of Expln. 3 to s. 43(1) and above mentioned circumstances, I may refer to case law referred to in the impugned orders of the Revenue authorities and considered by the learned AM. These are as under :

12.1 in the case of Guzdar Kajora Coal Mines Ltd. v. CIT [1972] 85 ITR 599 (SC) , their Lordships of Supreme Court on a similar provision under old Act of 1922 held as under :

"The original cost to the assessee of a particular asset is a question of fact which has to be determined on the evidence or material placed before 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 the 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 assessee 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 or allocation given in the deed or alleged by the assessee and to ascertain what the actual cost was or to determine the allocation between depreciable and non-depreciable assets.

It is, therefore, open to the IT authorities to determine and to the assessee to show whether the goodwill of the business taken over by the assessee is or is not included in the consideration or the price paid for the assets. Even if it is not expressly mentioned that goodwill has been sold it can be shown and ascertained by evidence whether the same has been purchased or not by the assessee.

In the deed of conveyance executed in favour of the assessee by the liquidators of the vendor company the consideration of Rs. 6 lakhs paid by it was allocated as follows : (a) machinery, plant, stores and other movables, Rs. 3,50,000 ; (b) buildings and structures Rs. 1,50,000; and (c) other assets not capable of being passed by delivery Rs. 1,00,000. For the asst. yrs. 1946-47 to 1951-52 depreciation was allowed to the assessee on the old WDVs. For the years 1952-53 and 1953-54 the assessee claimed depreciation on the basis of the valuation in its balance sheets and accounts. In his report called for by the Tribunal the ITO found, inter alia, that (i) some of the directors and shareholders of the assessee and the vendor-company were the same and connected; (ii) the valuation of depreciable assets and consumable stores were written up whereas the valuation of the non-depreciable assets were written down; (iii) though the vendor-company had been making good profits no provision had been made for the goodwill of the business. He allocated the consideration of Rs. 6 lakhs as follows : (a) goodwill Rs. 2,56,960, (b) mines and development as per balance sheet of the vendor-company, Rs. 2,48,323, (c ) stores and stock Rs. 60,744; and worked out the value of other depreciable assets at Rs. 33.973. The Tribunal rejected the assessee's claim holding, inter alia, that the allocation in the deed of conveyance was arbitrary. On a reference of the question whether the ITO was competent to go beyond the conveyance and fix a valuation of the assets on his own, the High Court answered the question in the affirmative. On appeal to the Supreme Court :

Held, on the facts, that there was no error or infirmity that would justify interference by the Supreme Court."

13. In the case of Ginners & Pressers (P) Ltd. v. CIT [1978] 113 ITR 616 (Bom) , assets of the firm were taken over at cost of Rs. 13,50,000 while their WDV in the hands of the parent company was only Rs. 2,21,412 while original purchase cost to the parent company was Rs. 5,52,475. The AO after applying proviso to s. 10(5)(a) and with the previous approval of the IAC, took the actual cost to the assessee at their WDV plus the balancing charges arising under s. 10(2)(vii ).

13.1 It is to be noted that in cited case, WDV was not taken as "actual cost" but it was WDV plus the balancing charges. The headnote of the report further suggests that the provision in question nowhere speaks of the market value being determined by the AO. So it is erroneously inferred that the decision is an authority for the proposition that actual cost is not the market value. However, if a reference is made to the judgment, it is found that their Lordships have observed as under :

"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)(a) 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)( a) to the facts of the present case………..

the correct market value of the assets transferred might have been lower than the consideration for which the transaction was effected and if such adverse inference has been correctly drawn by the Tribunal, it is obvious that the proviso to s. 10(5)(a) would be clearly attracted. What would be the normal market value of the assets as on the date of transfer is a different matter, but for the purpose of attracting the proviso to s. 10(5)(a) all that is required to be proved is that the market value of the assets transferred as on the date of their transfer was lower than the consideration for which the transfer had taken place and if the circumstances led to that adverse inference then the proviso to s. 10(5)(a) of the Act could be clearly attracted."

13.2 However, on peculiar facts and circumstances of the case and on account of behaviour of the witnesses (valuer) disowning knowledge of notes on the basis of which he had fixed valuation and other unacceptable facts stated coupled with other facts, adverse inference drawn by the Tribunal was held to be justified. It may be stated that there is no scope to draw any adverse inference against the assessee in these cases.

13.3 In the case of Jogta Coal Co. Ltd. v. Commissioner Of Income-Tax, Calcutta. [1959] 36 ITR 521 (SC) , the AO has held that whole of the price recited in the sale deed amounting to Rs. 23 lakhs and its allocation to different assets as mentioned in the sale deed was not correct and a portion of the consideration was for purchase of goodwill. Their Lordships upheld adoption of value of "goodwill" as under :

"We do not think that there is any doubt on the wordings of the section or on the interpretation that has been put upon those words that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who makes the sale but still the question remains whether the Tribunal has the jurisdiction to hold that what the appellant has actually paid as the price of a particular asset is not its real price and the price paid includes the price of some other asset which must have been purchased."

13.4 Their Lordships of Supreme Court ultimately held as under :

"Whether the law applicable should be as laid down in the English cases or in the cases decided by the Lahore High Court it is not necessary to decide because we think that the following two questions of law arise out of the order of the Tribunal and a reference should have been made to the High Court. These two questions were sought to be raised by the appellant under s. 66(1) of the Act and again before the High Court under s. 66(2) of the Act :

'(1)Whether on the interpretation of the sale deed it can be said that any goodwill was purchased by the assessee ?

(2)Whether in view of the said proviso to s. 10(5)(a) the ITO on the facts and circumstances arising out of this case was competent to go behind the conveyance and fix a valuation of his own in the way he has done ?'

Question No. I was not allowed by us to be argued because the matter was not taken in the statement of case on behalf of the appellant and the only question which survives for consideration is the second one, i.e., No. 7, and this question, as it is or with modifications, should have been referred to the High Court.

We therefore direct that the question with the necessary modifications, if any, be referred and the case stated in accordance with s. 66(1) of the IT Act. As to costs, in the event of the case being decided in favour of the appellant it will be entitled to the costs incurred in this Court but if it fails in the High Court it will have to pay the costs of the CIT in this Court. The case is therefore remitted with the direction that the Tribunal should proceed in accordance with law and the directions given above."

13.5 On remand the matter was taken by the Hon'ble Calcutta High Court which is reported as CIT v. Jogta Coal Co. Ltd. [1965] 55 ITR 89 (Cal) . The figure of property transferred and for which "actual cost" was determined under proviso to s. 10(2)(vi) of the IT Act is available from the report in the statement of case :

"As said above, the allocation of the consolidated sale price was furnished to the ITO as Rs. 23,00,000. Broadly speaking, this was made up as under :

The ITO was directed to calculate the depreciation in accordance with the said estimates."

13.6 In the case of Pindi Kashmir Transport Co. Ltd. v. CIT [1954] 26 ITR 595 (Lahore), it was held as under :

"Certain business concerns carrying on the business of road transport were amalgamated and formed into a private limited company which took over from their vehicles and route permits in consideration of allotting to them fully paid-up shares in the company. The company sold some of the vehicles purchased from the shareholders and claimed to have incurred a loss. In computing the original cost to the company of the vehicles for the purpose of making an allowance for depreciation and loss under s. 10(2)(vi) and (vii) of the IT Act, 1922, the IT authorities held that they were not bound to accept the nominal value of the shares transferred as the actual cost of the vehicles to the company in as much as the value of the vehicles had been unduly inflated. They therefore determined by a certain method the actual cost of the vehicles to the company : Held, that, in the circumstances of the case, the IT authorities were justified in law in going behind the contract of sale in determining the original cost to the company for the purpose of making an allowance under cls. (vi) and (vii) of s. 10(2) of the IT Act."

13.7 In the case of Kungundi Industrial Works (P) Ltd. v. CIT [1965] 57 ITR 540 (AP) , the firm constituted themselves to a private limited company and took over assets of the firm at Rs. 63,000 and Rs. 87,000 while their WDV in the hands of the firm was Rs. 3,994 and Rs. 13,210 respectively. The AO in terms of proviso to s. 10(5)(a) took actual cost at the WDV. On appeal, the Tribunal fixed value of assets transferred at Rs. 25,000 in excess of the WDV of the two items. Their Lordships upheld above action as on facts they found that the increase in the value was substantial and out of all proportion to the WDV. The ITO was held to have power to go behind the contract and make his own estimate with the approval of the IAC.

13.8 Their Lordships also made the following observations :

"It is the actual cost of the assets to the assessee that should determine the statutory allowance for depreciation. Ordinarily the contractual price will be deemed to be the actual cost. But in certain cases it may be palpably fictitious………….

As observed in Harveys Ltd., the original cost of any particular asset is entirely a question of fact, and like any other question of fact depends upon the evidence produced to prove it."

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 (i) 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. ( 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 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 the "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 Expln. 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 even in case of a transaction between connected and related parties if fixed bona fidely as per market conditions. There is no prohibition on connected parties to carry arm's length transactions where real value of item transferred is paid. Law frowns on fraudulent transactions 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. (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)(a) 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)( a) 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 sonic 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(xlii) 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 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 the case of Ashwin Vanaspati Industries ( supra) at p. 33 observed as under :

"Hence, it is crystal clear 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 of 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 In spite 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 1st 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.

18.3 It is well-known that registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their reports. They are competent to fix value of properties for several earlier years. Even otherwise WTO in the wealth-tax purposes is required to determine in the present, the value of assets as on the valuation dates which may be five or seven years earlier. If this is not possible, as is being inferred by the learned CIT(A) and by the learned AM, then scheme of fixation of value of assets under the WT Act cannot work. Such a view would defeat the very purpose of the WT Act and, therefore, cannot be accepted as correct. As regards fixation of value of assets as on 1st April, 2003, I do not see anything wrong if parties having regard to their experience and other factors available at the relevant time had fixed the value of assets transferred. It was for the AO to point out and find defect in the value (cost shown) claimed and proceed to determine the actual cost. AO was to collect and examine all the relevant material available on record including actual cost of hoardings and not mechanically adopt value at nil. Besides cost of hoardings, life of hoarding at the time of transfer, increase in cost of making and erection of such hoardings etc. was to be seen. Whether cost (value) got depreciated on account of wear and tear was to be examined. The list of circumstances is by no means exhausted and there can be other relevant circumstances required to be considered in the exercise of determination of actual cost of the hoarding.

19. Another difficulty in the present case is the unnecessary burden placed on the assessee and unjustified adverse inference drawn against the assessee. As noted earlier, the learned AM has observed :

(i) Schedule 1 to the sale deed not produced before the Tribunal and, therefore, basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark not raised before us.

There is no separate mention of hoardings, other than in memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings.

There is nothing before us to show that assessee had acquired hoardings for a sum of Rs. 4,77,96,000 and the same was actual cost of assets to the assessee. Is (Rs. 4,77,96,000) this actual cost to the assessee ? There is no basis before us for fixing the consideration of Rs. 8 crores nor Sch. 1 referred in the memorandum has been placed before us.

20. it is evident from above that burden of proof was placed on the assessee whereas it should have been otherwise as discussed above. This placing of the wrong burden sometimes vitiate the entire order. I am further of the opinion that AM was not justified in drawing any adverse inference against the assessee or for copy of Sch. 1 to the memorandum not being part of Tribunal record. If learned AM was interested, he could have asked the assessee to furnish the copy. His observations that there is nothing on record to show that assessee paid Rs. 4.77,96,000 for hoardings do not appear to be correct. It is clear from the perusal of order of the AO and that of CIT(A) that Revenue authorities at no stage doubted correctness of consideration of Rs. 8 crores through the allotment of shares, nor did they question value shown on any of the three assets in dispute. In fact Revenue authorities fully accepted the figure of cost of 3 assets as shown by the assessee. It was their case that it was inflated to wrongfully claim higher depreciation to avoid payment of tax. Therefore, the learned AM, after the hearing of the case was over and after the JM had proposed his order, has drawn inferences on non- production of copy of Sch. 1 and on assessee's failure to show basis of consideration of Rs. 8 crores. In my view, learned AM is not justified in raising doubts on position and figures clearly accepted by the Revenue authorities i.e., AO and on appeal by the learned CIT(A).

21. It may be relevant to state here that while granting approval to AO's action under Expln. 3, vide letter dt. 21st Dec, 2006, the learned Asstt. CIT has clearly noted, "from the comparison of fixed assets schedule (both as per deduction and as per IT Act)". So copy of schedule was clearly available to the AO and, therefore, same is to be treated as part of the record. At any rate in the memorandum dt. 1st April, 2003, the consideration of Rs. 8 crores is mentioned at several places and it is accepted position that assessee company had acquired running business with all assets and liabilities.

22. The hoardings as per the JM are 2,100 in number and this number has not been controverted by learned AM or by Revenue during the course of hearing. Valuation report in support of the price paid by the assessee at Rs. 4,77,96,000, dt. 3rd Oct., 2004 has been placed. It is true that at the time of transfer i.e., on 1st April, 2003, aforesaid report was not available. But that could not prevent the shareholders or partners to fix the price or cost of the hoardings as on 1st April, 2003. Registered valuer was also fully competent in October, 2004 to give the valuation of hoardings as on 1st April, 2003. Valuation report could not be rejected on the ground that it related to a prior date. It was necessary and incumbent on the AO to consider the material or reasons given by the registered valuer in support of the valuation report as has been laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries (supra). The question was whether material and reasons given in the report were sound. The AO could have very well Seen cost of hoardings shown by the erstwhile firm. Merely because cost of hoardings was claimed as a revenue deduction, it cannot follow that its value even in the hands of the transferee should be nil. Copy of valuation report is available at pp. 89 to 123 of the paper book. The situation and size of each hoarding is given in the said report. The rate applied for value of each hoarding is also given. Whether hoarding is fixed on ground or on a terrace is also mentioned. It was for the AO to see above details and then reach a conclusion on the facts and in the circumstances of the case whether such detail was reliable to what extent to determine the "actual cost". No exercise on above lines was undertaken by the AO. The registered valuer in its report has also given further basis of valuation by taking into account cost of labour, board, colour, RCC footing and miscellaneous expenses. Average working of cost of hoarding is also provided. All the above details could be examined and then rejected or accepted as warranted by the facts of the case. One wonders how cost of 2,100 hoardings purchased by the assessee can be nil. It has been taken at nil because it was not an asset with the erstwhile firm. In my considered opinion, there is no nexus between material on record and the conclusion of nil cost drawn in this case. One could have understood if it was held that hoarding had already lived its utility and had no intrinsic value at the time of transfer to the assessee company. No such finding on life or value of hoardings or their utility had been recorded. Exercise of determining the actual cost of hoarding as on 1st April, 2003 was not undertaken by the AO. The relevant facts noted above or position of hoarding was not examined, The approval required from the higher authorities was granted in this case in a routine mechanical manner. Because hoardings were not shown as an asset by the erstwhile firm, their "actual cost" was "determined" at nil without denying the fact that assessee had paid Rs. 4,77,96,000 for the hoardings. The learned AM with utmost respect, did not pursue the relevant record of the AO or CIT(A) to see facts clearly admitted by the Revenue authorities.

23. Proceeding to the question of actual cost of goodwill or trade name, it is well established that goodwill is an important asset of business which is acquired over a period of time. There are well-recognized methods of computing value of goodwill/trade name of a business. It is computed by taking into account profits made by the concern over a period, capital employed, efforts of the partner etc. and thereafter its value is determined. As per information placed on record, sales effected by the firm and the company are available at p. 73 of the paper book. The turnover of the firm in the last year of its business i.e. in financial year 2002-03 is shown at Rs. 8,58,26,749. In the earlier two years also, it is more than Rs. 8 crores. It jumped upto Rs. 11,67,00,000 in the first year of company's business and thereafter it jumped to Rs. 14,38,00,000. These turnover figures are not in dispute. Based on above turnover figures, the registered valuer who without a doubt is an expert, determined the value of goodwill/trade name at Rs. 3 crores. Detailed calculations are given in the valuation report. It was open to the AO to examine those calculations and to arrive at its own conclusion. Such exercise was not undertaken. Merely because goodwill acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken at nil. How could value of goodwill or trade name for a concern making high profit and in business for several years, be nil ? What the AO has done is quite contrary to the principle laid down by the Supreme Court in the case of Jogta Coal Co. Ltd. ( supra). In the said case, it was held that having accepted the total cost for the transfer and where the actual cost of assets determined is less than the stated sale consideration, the differences would be taken towards goodwill of the business. Here the parties under agreement themselves determined the value of goodwill and stated the same in the memorandum of transfer which is further supported by an expert opinion. The AO, without considering relevant facts and circumstances of the case and for erroneous reasons, took actual cost of goodwill at nil. In my considered opinion, no basis whatsoever has been given for taking value of goodwill/trade name at nil. No fault has been found in the valuation report given in this case and, therefore, the same could not be rejected. Above aspects have not been noted by the learned AM in his proposed order.

24. Even in the ease of buildings at Rajkot and Surat, actual cost of these buildings has been taken at the WDV found in the hands of the firm. In these days of high inflation, value of immovable properties like land and buildings have jumped several fold and there is no comparison between the value/worth of a building and its WDV in books. AO made no attempt to find whether there was any error in the cost of buildings claimed by the parties in the memorandum. Therefore, the said figure could not be rejected.

25. In the above circumstances and when no attempt was made by the AO to undertake exercise of finding actual cost as required by the statutory provision and as per principles laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries v. Commissioner Of Income-Tax ( supra), it is not possible to hold that provisions of Expln. 3 to s. 42(1) have been rightly applied. No good ground has been laid for not accepting cost fixed between the parties in the memorandum as "actual cost" of three assets. The power vested in the AO in Expln. 3 to s. 43(1) was not exercised in accordance with law. Without proper determination of "actual cost", it is not possible to record a satisfaction that assessee has claimed depreciation on enhanced cost of assets to the assessee. In view of close connection between circumstances/conditions (ii) and (iii) and in view of my finding on condition No. (iii), I hold that condition No. (ii) is also not satisfied. No case for taking action under Expln. 3 to s. 43(1) has been made out. On facts and circumstances of the case, there was no justification to remand the matter back to the AO to have another innings and determine actual cost of goodwill/trade name and of buildings at Rajkot and Surat.

26. I have also gone through the decision of Hon'ble Madras High Court in the case of CIT v . Sekar Offset Press [1995] 214 ITR 516 (Mad) . In that case, the assets were transferred at the market value between partners. The Court held that Expln. 3 to s. 43(1) had no application to the case as the main purpose of the transfer of assets was not reduction of tax liability. The decision is relevant. The other decision of the Tribunal in the case of Unimed Technologies Ltd. v. Dy. CIT [2000] 73 ITD 150 (Ahd) is also considered relevant as in above ease, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee's valuer. In the absence of any other valuation report and there being no other evidence to show that the report was not reliable, it was held that valuation report filed by the assessee could not be ignored. Factual position here is similar. I am, therefore, of the view that two decisions cited on behalf of the assessee are relevant to the facts of the case. Learned AM in the proposed order has taken great pains to distinguish the decision of the jurisdictional High Court in the case of Ashwin Vanaspati Industries (supra). However, I do not find any material distinguishing feature to hold that principles laid down in that case are not applicable to the facts of the case before me. In my considered opinion, the aforesaid decision should be applied to consider whether Expln. 3 to s. 43(1) is correctly applied. This aspect has been elaborated above.

27. For the aforesaid reasons, I completely agree with the order proposed by the learned JM on all the three questions. In the above view of the matter, there is no need to modify the proposed questions.

The matter may now be placed before a regular Bench for disposal as per law.