Commissioner of Income Tax vs United Fats and Oils (P.) Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256 of the income tax Act, 1961 (''the Act'') for the assessment years 1976-77 and 1982-83 the following common question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, and in view of the agreement dated 25-8-1975 the Tribunal was right in law in holding that the cost of plant and machinery for the purposes of depreciation be taken at Rs. 4,70,000 and not Rs. 3,20,000 originally fixed ?

The facts leading to this reference are that the assessee is a limited company deriving income from business of running an oil mill. In the relevant period Shri B.K. Chandra was one of the Directors of the assessee-company. He sold plant and machinery to the assessee for a sum of Rs. 3,50,000 as per agreement dated 31-7-1975. Subsequently, additional amount of Rs. 1,20,000 was further paid by the assessee to Shri B.K. Chandra as per the valuation report dated 30-9-1975 and second agreement dated 6-10-1975. In the assessment year 1976-77 the assessee-company claimed depreciation taking written down value of the machinery purchased at Rs. 4,70,000. The ITO took the view that real cost of plant and machinery was Rs. 2,50,000 as paid under the earlier agreement and subsequent payment of Rs. 1,20,000 was made ex gratia merely to reduce the tax burden of the assessee by claiming higher depreciation. He obtained the prior approval of the IAC under Explanation 3 to section 43 and took the written down value at Rs. 3,50,000 for the purpose of depreciation. The assessee filed appeal before the Commissioner (Appeals) against the above order. The Commissioner (Appeals) in the assessment year 1976-77 upheld the action of the ITO with following observations:

I have considered the submission but no evidence has been shown before me In support of the contention that the liability to pay the amount was known only In this year under appeal and as such the disallowance made by the ITO is upheld.

The main contention of the assessee in this appeal is against the disallowance of depreciation allowance on the sum of Rs. 1,20,000 which is claimed by the assessee as the enhanced cost of plant and machinery and other assets. The income tax Officer considered that this sum of Rs. 1,20,000 was so arranged by the assessee in order to reduce the tax liability and after taking the approval of the IAC. Under Explanation 3 of section 43 the depreciation allowance on the said sum was not allowed. The assessee has submitted that the disallowance made by the ITO is not correct and cannot be sustained. The cost of the assets was enhanced by a separate agreement with late S.K. Chandra and Company. Therefore, the depreciation allowance should be allowed on such enhanced cost to the assessee. Moreover, the assessee has fulfilled all the contentions prescribed in connection with the claiming of depreciation allowance and there is no reason why the depreciation allowance on the enhanced cost of the assets should not be allowed to the assessee. The learned counsel submitted that on the facts and the circumstances of the case, the depreciation allowance claimed by the assessee on the enhanced cost is admissible as deduction.

I have considered the submissions of the learned counsel and the order of assessment together with the facts and circumstances of the case. In this case it appears that certain assets were purchased by the company according to the deed dated 25-8-1975. The details of the assets are according to the schedule of assets attached to the said deed. The cost of consideration according to the deed was Rs. 3,50,000. The deed was given effect from 31-7-1975 and the assets were given delivery and taken possession of, accordingly, with effect from 31-7-1975. Later, at the request of the assessee, the costs of the assets were revalued at a total value of Rs. 4,70,000 according to the valuation dated 20-9-1975 by a Chartered Engineer. Another agreement dated 6-10-1975 was entered into between the assessee and the original seller to the effect that the difference between the cost of Rs. 3,50,000 and the cost as determined by the Engineer was to be paid in cash. This difference amounted to Rs. 1,20.000. It is on this difference of Rs. 1,20,000 that the income tax Officer refused to allow the depreciation allowance. Having carefully considered the submissions and the facts and the circumstances of the case I hold that the income tax Officer is justified in refusing to allow depreciation allowance on the enhanced cost of the assets claimed by the assessee. The assets were sold once and for all according to the Deed dated 25-8-1975 at a cost of Rs. 3,50,000 and the amount of consideration was fully paid and the assets were delivered to the assessee by the seller and they were also taken possession of by the assessee. The transaction, therefore, was complete and final on the basis of the Deed dated 25-8-1975. As such there is no reason justifying the revision of the cost of the assets. In fact it is seen that the revaluation was made at the instance of the assessee. On the facts and circumstances of the case the disallowance of depreciation allowance made by the income tax Officer on the sum of Rs. 1,20,000 is upheld.

On further appeal by the assessee against the order of the Commissioner (Appeals) the Tribunal directed that the assessee should be given depreciation on the plant and machinery by taking its cost at Rs. 4,70,000 for the reasons contained in para 8 of its order which is reproduced below:

We have considered the contentions of both the parties as well as the facts on record. We find enough force in the contentions raised for the assessee. There is no dispute about the fact that the assessee had made the payment to the tune of Rs. 4,70,000 towards the cost of the plant and machinery acquired by it. There is also no dispute about the fact that the vendor has been taxed on the footing that he received Rs. 4,70,000 as the sale proceeds of the plant and machinery under consideration. The only fact that has been held against the assessee by the revenue is the omission to mention in the original agreement about the valuation to be made by a registered valuer. In our opinion, it would not be fair to hold that omission against the assessee when there is strong evidence to point to the contrary. Considering all these facts and circumstances of the case, we hold that the assessee should be given depreciation on the plant and machinery by taking its cost at Rs. 4,70,000 and the assessment be modified accordingly.

For the assessment year 1982-83, the ITO again calculated depreciation taking cost of the plant and machinery at Rs. 3,50,000. The Commissioner (Appeals) confirmed the action of the ITO but the Tribunal directed that the depreciation should be allowed taking cost at Rs. 4,70,000.

None appeared for the assessee in this case. Mr. Murarka, learned Advocate as amicus curias has rendered assistance in this. We record our appreciation for such assistance.

Our attention has been drawn to the two agreements. The first agreement is dated 25-8-1975. In the said agreement it was provided that the consideration was settled at Rs. 3,50,000 and the purchaser shall satisfy the consideration as agreed by and between the vendor and the purchaser by issuing to the vendor or its nominee or assignee its equity shares at par to the value of the said sum of Rs. 3,50,000 in the capital of the company and credited as fully paid-up. This agreement does not refer to any valuation to be made of the assets which have been mentioned in the agreement itself.

Thereupon on 6-10-1975 another agreement was arrived at by and between the vendor and the purchaser. This agreement records as follows:

(1) Whereas the vendor and the purchaser have mutually agreed upon that the assets as embodied in the Principal Agreement be valued by a Chartered Engineer at the Vendor''s cost and the consideration price of the said assets shall be the value as it will be determined by the said Chartered Engineer.

(2) Whereas both the purchaser and the vendor have mutually agreed upon that any difference as to the consideration price as embodied in the Principal Agreement and the valuation of the Chartered Engineer shall be settled by payment of cash.

(3) Whereas the Chartered Engineer Valuation Report dated 3rd October, 1975 has been received by the Company and the valuation of the assets as made by him is annexed to this Agreement.

Now it is hereby agreed and declared as follows:

i. That the consideration of the plant and machinery, furniture and fixtures and accessories as embodied in the Principal Agreement be settled at Rs. 4,70,000 and the purchaser shall satisfy the balance consideration of Rs. 1,20,000 to the Vendor by payment of cash within a period of six months hereof.

Save as hereby modified the Principal Agreement shall remain in full force and effect and shall henceforth be construed and read subject to the provisions of this Agreement.

It is true, as contended by the learned counsel for the revenue, that in the original agreement the consideration was only mentioned as Rs. 3,50,000 and not Rs. 4,70,000 and there was no question of revaluation of the assets. It appears thereafter that for some reason or other the assets had been revalued but the crucial fact in this case which has been recorded by the Tribunal is that after revaluation the dues of Rs. 1,20,000 as agreed on the basis of the revaluation have been paid by the purchaser to the vendor. It appears to us that the revenue has not challenged the second agreement to be a sham agreement. When under the agreement the consideration has passed and the vendor has received the consideration, it cannot be said that the assets have not been purchased at a sum of Rs. 4,70,000. In our view, the real cost of the plant and machinery has to be determined on the basis of the two agreements and the consideration which in fact passed by and between the vendor and the purchaser. Although the ITO sought to contend that the additional payment of Rs. 1,20,000 was made ex gratia by the purchaser, the Tribunal has not decided the issue on that ground. Having regard to the facts and circumstances of the case and the finding of the Tribunal as we have already noted above, the question in this reference must be answered in the affirmative and in favour of the assessee. There will be no order as to costs.

Sen, J. -I agree.