Delhi High Court
De Nora India Limited (Earlier ... vs Cit And Another on 22 December, 2014
Author: V. Kameswar Rao
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on August 28, 2014
Judgment delivered on December 22, 2014
+ INCOME TAX APPEAL NO. 190/2002
DE NORA INDIA LIMITED (EARLIER KNOWN AS M/S
TITANOR COMPONENTS LTD.) ..... Appellant
Through Mr. C.S. Jain and Mr. G. Tushar
Rao, Advocates.
versus
CIT AND ANOTHER ..... Respondent
Through Mr. Sanjeev Sabharwal, Sr. Standing
Counsel & Ms. Swati Thapa,
Advocates.
INCOME TAX APPEAL NO. 191/2002
DE NORA INDIA LIMITED (EARLIER KNOWN AS M/S
TITANOR COMPONENTS LTD.) ..... Appellant
Through Mr. C.S. Jain and Mr. G. Tushar
Rao, Advocates.
versus
CIT AND ANOTHER ..... Respondent
Through Mr. Sanjeev Sabharwal, Sr. Standing
Counsel & Ms. Swati Thapa,
Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
V. KAMESWAR RAO, J.
1. These two appeals filed by the assessee DENORA India Ltd. (earlier
known as M/s Titanor Components Ltd.) under Section 260A of the Income Tax
ITA No. 190 & 191/2002 Pa ge 1 of 15
Act, 1961 („Act‟ in short) relate to assessment years 1990-91 and 1991-92,
wherein challenge has been made to the common order dated December
21,2001 passed by the Income Tax Appellate Tribunal, Delhi Bench („Tribunal‟
in short) in ITA No.1730/Delhi/1999 and ITA No.1356/Delhi/1995, whereby
the Tribunal has dismissed the appeals of the appellant assessee on the question
of determination of actual cost paid by the appellant to M/s Wimco Ltd. on
acquisition of fixed assets.
2. The common substantial question of law which was framed vide order
dated 15.09.2003 in these appeals is as under:-
"Whether on the facts and in the circumstances of the case the
Tribunal was correct in law in placing reliance on surveyor's
report for the purpose of determining the actual cost of the asset
acquired by the assessee from M/s Wimco Ltd.?"
3. The relevant facts necessary for the disposal of these appeals are that the
appellant company was incorporated on 07.06.1989 for establishment of an
industrial undertaking for manufacture of coated metal electrodes, cathodic
protection systems and chloralkali cells. The appellant company on 30.11.1989
entered into an agreement with M/s Wimco Ltd. to purchase its metal anode
division, a going concern, with all its assets, liabilities and obligation specified
in the agreement of even date. The purchase price agreed and paid by the
appellant assessee to M/s Wimco Ltd. was Rs.6,03,21,910/- to be paid in cash;
the purchase price fixed was for acquisition of a running undertaking with all
assets and liabilities. The first assessment year of the appellant company was
ITA No. 190 & 191/2002 Pa ge 2 of 15
assessment year 1990-91. The actual cost of fixed assets acquired was not
examined by the Assessing Officer and assessment made was completed at „nil‟
income. The matter regarding determination of actual cost was considered for
the first time by the Assessing Officer during the assessment year 1991-92.
Relying upon surveyor‟s report, the value of the said assets was taken as
Rs.3,50,37,238/-. We note that the said surveyor was appointed by the appellant
company. The appellant company carried out the matter in appeal to the
Commissioner of Income Tax (Appeals) [CIT(Appeals), for short] for both the
assessment years 1990-91 and 1991-92. The CIT (Appeals) did not agree and
held that the Assessing Officer had rightly computed the cost of fixed assets
acquired at Rs.3,50,37,238/- as against Rs.6,10,02,641/- claimed by the
assessee. He directed the Assessing Officer to make fresh assessment for the
assessment year 1990-91 after considering the claim of depreciation of assets
acquired from M/s Wimco Ltd. in the light of his findings in the assessment
year 1991-92. Thereupon the Assessing Officer passed an appeal effect order
under Section 143(3) read with Section 250 of the Act for the assessment year
1990-91 dated January 27, 1995, whereby he held that the actual cost of fixed
assets acquired for the purpose of depreciation should be taken at
Rs.3,50,37,328/- as per surveyor‟s report. On appeal, the CIT (Appeals)
affirmed the said findings observing that the Assessing Officer merely followed
the earlier order in appeal for the assessment year 1991-92. The appellant being
aggrieved filed appeals before the Tribunal against the order of the CIT
ITA No. 190 & 191/2002 Pa ge 3 of 15
(Appeals) for the assessment year 1990-91 and 1991-92, which appeals were
dismissed by a common impugned order December 21, 2001.
4. The contention of the assessee is that depreciation is to be allowed
on the actual cost incurred and this is the mandate of Section 32 read with
Section 43(6) and 43(1) of the Act. It is submitted that the surveyor‟s
report was an internal document and cannot disturb and override the actual
cost incurred or paid for the fixed assets. At best, the surveyor‟s report was
hypothetical or an estimate and should not be equated with the actual cost.
Reliance is placed on the judgment of the Supreme Court in Challapalli
Sugars Ltd. Vs. Commissioner of Income Tax, A.P. [1975] 98 ITR 167
(SC).
5. We may record that before the Assessing Officer, the assessee had
computed "actual cost" for acquisition of fixed assets at Rs.6,10,02,641/-.
In the alternative it was submitted that Rs.4,60,99,228/- be treated as
"actual cost" of fixed assets. The said figure was computed by assessee
after reducing net current assests, loss for the period 01.12.1989 to
30.3.1990, capital work-in-progress and addition to plant and machinery
between 01.12.1989 to 30.3.1990. Assessee had also submitted that there
was no dispute in respect of various obligations amounting to
Rs.1,49,03,413/- as these were revenue expenditure in the years when
actually paid.
6. In order to appreciate the controversy, we will like to reproduce the
ITA No. 190 & 191/2002 Pa ge 4 of 15
computation made on the question of "actual costs" enclosed by the
appellant assessee with the present appeal as Annexure-B. It is stated that
the said computation was also filed before the Tribunal. The same is as
under:-
"CASE AS PLEADED BEFORE ASSESSING OFFICER AND
COMMISSIONER (APPEALS)
PARTICULARS AMOUNT (Rs.) AMOUNT (Rs.)
TOTAL CASH 6,03,21,910/-
CONSIDERATION PAID
ADD: OBLIGATIONS
NRDC ROYALTY 75,00,000/-
WARRANTIES 72,96,000/-
GRATUITY 1,07,413/-
LESS:OTHERALLOCATIONS
LOSS FOR THE PERIOD 1.12.89
TO 30.3.90 11,57,339/-
CAPITAL WORK-IN-
PROGRESS NEW PROJECT 39,74,515/-
WORKING CAPITAL 89,75,211/-
PLANT & MACHINERY
NEW ADDITION 1,42,22,682/-
COST OF FIXED ASSETS
CLAIMED IN THE BALANCE
SHEET 6,10,02,641/- 6,10,02,641/-
CASE NOW PUT FORWARD BEFORE HONOURABLE TRIBUNAL
LESS: OBLIGATIONS WHICH CANNOT LEGALLY
BE CAPITALISED (NRDC, WARRANTIES, AND GRATUITY)
CLAIMED AS REVENUE EXPENDITURE AS AND WHEN
ACCRUED/INCURRED 1,49,03,413/-
4,60,99,228
INTEREST ON UNPAID PURCHASE CONSIDERATION
FOR THE PERIOD 1.12.89 TO 29.3.90 NOW
CLAIMED AS REVENUE EXPENDITURE FOR
THE ASSESSMENT YEAR 1990-91 21,53,714/-
ITA No. 190 & 191/2002 Pa ge 5 of 15
COST OF FIXED ASSETS NOW CLAIMED
BEFORE THE HON‟BLE TRIBUNAL 4,39,45,514/-
COST OF FIXED ASSETS ESTIMATED BY
THE DEPARTMENT 3,50,37,238/-
ADD: ESTIMATED INTEREST COST FOR
THE IMPLEMENTATION PERIOD AS PER SUPREME
COURT DECISION 98 ITR 167, 173 60,00,000/-
ESTIMATED ESTABLISHMENT COST DURING
IMPLEMENTATION PERIOD AS PER DECISION ABOVE 24,00,000/-
4,34,37,238/- "
7. The aforesaid chart would indicate that Rs.1,49,03,413/- i.e.
obligations relating to NRDC royalty, warranties and gratuity were to be
claimed as "business expenditure" as and when incurred or accrued. With
regard to the interest of Rs.21,53,714/-, we are not concerned as the matter
was remanded. The last two figures i.e. Rs.60,00,000/- and Rs.24,00,000/-
have not been argued and raised before us.
8. What was acquired and paid for by the appellant-assessee was for
on-going or a running undertaking. An undertaking was acquired in terms
of the agreement dated 30th November, 1989 between the assessee and
Wimco Ltd. The consideration paid was not bifurcated and divided into
different heads, as it was a case of a purchase of a running business with all
assets and liabilities. The assessee had taken over all obligations and rights
including advantages, handicaps, distribution network, long-term debts,
investments, patent, trademarks, know-how etc. The agreement stipulates
ITA No. 190 & 191/2002 Pa ge 6 of 15
that the assessee would acquire the assets including the land allotted in
district Rampur, buildings comprising coating shop, fabrication shop, DG
set room etc., plant and equipments as per the details, stock-in-process,
stock-in-trade, ram materials, contractual rights with customers and
suppliers, receivables from trade or others and petty cash related to the said
business. The assessee was also to get benefit of all permits, consents and
approvals and all benefits attached thereto or occurring to the said business
including rights, title, benefits, interests and advantages under the industrial
licence, import licences and other licenses, quotas whether registered or
otherwise, import and export entitlements. In addition, the assessee had
also taken over rights, title, benefits and advantages, duties, liabilities and
obligations under various agreements, arrangements and understandings
pertaining or relating to business with customers, suppliers and others
including the goodwill. Thus, the consideration paid of Rs. 6,03,21,910
was for a running and going concern and to acquire an undertaking.
Rs.6,03,21,910/- was not sub-divided or bifurcated under the said
agreement under different heads. Value of the fixed assets, which were
transferred and on which depreciation was earlier claimed by Wimco Ltd.
and after acquisition by the assessee was not specified or so stated in the
agreement itself. It was lump sum payment.
9. The appellant had however filed before us details of final purchase
consideration paid to Wimco Ltd., which is as under:-
ITA No. 190 & 191/2002 Pa ge 7 of 15
"PARTICULARS AMOUNT
(in Indian Rupees)
Basic purchase, consideration based on 56580256
Net Operating Assets as on 31.3.1989.
Increase in purchase consideration @ 2153714
17% on the unpaid amount for the
period 1.12.89-29.3.90
Interest on delayed payments 7560
Increase/(Decrease) in purchase
consideration due to movements with
effect from 1.4.89
i) On account of fixed assets 3781995
ii) On account of working capital 7088869
iii) Loss for the period 1.4.89- 3423556
30.3.90
iv) Corporate overheads 1200000
v) Increase @ 17% on the next 103578
monthly movement of above
Fifty per cent stamp duty paid at 160140
Bombay
TOTAL 60321910"
10. Another chart enclosed with the appeal by the assessee, pertains to
and give details of balance to be allocated on fixed assets, reads as under:-
"BALANCE TO BE ALLOCATED ON FIXED ASSETS
PARTICULARS MARKET STAMP TOTAL FACTORED
VALUE DUTY VALUE
LAND 1357500 20497 1377997 2367962
BUILDING:
-RESIDENCE 3300480 49835 3350315 5757212
-FACTORY 5947898 89808 6037706 10375249
PLANT & M/C 24043043 24043043 41315782
FURNITURE 388317 388317 6672387
MOTOR CAR 13417 13417 23056
(WDV)
PATENT (WDV) 288693 160140 35499488 61002641"
11. A reading of the aforesaid chart would indicate that the appellant-
assessee had factored value of land at Rs.23,67,962/-. It is obvious;
depreciation is not to be allowed on land. The aforesaid chart also gives
details of the market value, stamp duty and the total value of the fixed
ITA No. 190 & 191/2002 Pa ge 8 of 15
assets purchased. The same was Rs.3,54,99,488/- including value of land
taken at Rs.13,77,997/-.
12. It is evident that what was purchased by the appellant asseessee was
an undertaking there being slump sale and the entire business including
assets and liabilities were transferred for a lump sum amount. There was
no break-up or division of the said amount in the agreement itself. The
amount paid would be the sale consideration paid after taking into account
value of the plant, machinery, dead stock as well as work in progress, stock
in trade etc., and intangible items like goodwill, manpower, values of
different licences etc. This cost paid would be for both depreciable and
non-depreciable assets. In such cases, difficulties do arise in computing
the actual cost of the assets on which depreciation is to be allowed to the
purchaser i.e. the appellant assessee. There are decisions which hold that
the lump-sum price cannot be attributed for different items if no bifurcation
or division being made by the assessee or by the purchaser. But in the facts
of the present case, there is evidence that the appellant assessee and the
seller had evaluated the plant and machinery on the date of the sale.
Therefore, the authorities and the Tribunal deemed it appropriate to rely
upon the surveyor‟s report for computing actual cost and we agree with the
said conclusion.
13. CIT vs. Artex Manufacturing Co. (1997) 227 ITR 260, was a case
of slump sale on lump-sum price, but the Supreme court held that the
ITA No. 190 & 191/2002 Pa ge 9 of 15
balancing charge under Section 41(2) of the Act could be computed, inspite
of the fact what was payable by the assessee was the difference between
written down value and the actual cost of the depreciable asset on sale.
This, it was held, was possible in the said case, as necessary information
was furnished by the assessee before the Assessing Officer. The Supreme
Court rejected the contention of the assessee that the value of the plant,
machinery and dead stock was not mentioned in the agreement for slump
sale and therefore no value could be attributed to different items, observing
that the assessee had himself furnished the information to the Assessing
Officer and, therefore, it cannot be said that the price attributed to the items
transferred was not indicated. In the same volume, the Supreme Court in
CIT vs. Electric Control Gear Mfg. Co. (1997) 227 ITR 278, concluded
otherwise in case, again of slump sale with a lump-sum consideration being
paid for a going concern, on the ground that the assessee had not furnished
the bifurcation or information in this regard.
14. This distinction was noticed by the Supreme Court in PNB Finance
Ltd. vs. CIT (2008) 307 ITR 75 (SC). This was a case relating to capital
gains under Section 45 of the Act. The Supreme Court reversed the
decision of the High Court holding that Section 45 was not applicable, for
it was not possible to apply the computation provision which was
inextricably linked and together with the charging section constituted an
integrated code. Thus, an undertaking cannot be confused with its parts or
ITA No. 190 & 191/2002 Pa ge 10 of 15
assets and in case lump sum payment was made, it cannot be earmarked
item wise. However, in the said decision Supreme Court noticed the
decision in Artex Manufacturing Co. (supra) where in the case of slump
sale for lump-sum amount, bifurcation was accepted on the ground that
there was evidence on record submitted by the assessee. The sale
consideration for plant, machinery, dead stock etc. was arrived at and
computed. The valuation report in Artex Manufacturing Co. (supra) was
used for computing liability under Section 41(2) of the Act. In the present
case, as noticed above, the assessee had appointed a surveyor who had
computed and valued the fixed assets to be transferred. This information
was furnished by the assessee, bifurcating a purchase price. Thus, the
valuer‟s report etc. was treated and constituted as the actual cost paid by
the appellant assessee in respect of fixed assets for the purpose of
depreciation. Actual cost as per the assessee was ascertainable with
reference to the said document i.e. the surveyor‟s report. To hold to the
contrary, would be ignoring the information and material which formed the
very basis of the transfer and relied by the appellant assessee.
15. In Challapalli Sugars Ltd. (supra), the Supreme Court has held that
the expression „cost‟ is not synonyms with „price‟ and would include the
actual cost paid by the assessee, to acquire the asset in question and other
expenses such as freight, warehouse charges or insurance and interest to
bring the asset into existence and put them into working condition. Interest
ITA No. 190 & 191/2002 Pa ge 11 of 15
on monies borrowed for purchase of fixed asset prior to asset coming into
production i.e., till the erection stage should be capitalised. It was held as
under:-
"15. It would appear from the above that the accepted
accountancy rule for determining the cost of fixed
assets is to include all expenditure necessary to bring
such assets into existence and to put them in working
condition. In case money is borrowed by a newly
started company which is in the process of
constructing and erecting its plant, the inte-rest
incurred before the commencement of production on
such borrowed money can be capitalised and added to
the cost of the fixed assets which have been created as
a result of such expenditure. The above rule of
accountancy should, in our view, be adopted for
determining the actual cost of the assets in the absence
of any statutory definition or other indication to the
contrary".
16. The aforesaid decision does not help or assist the assessee in the
present case, for we are not concerned with what should be capitalised, but
we have to answer what was the actual cost of the fixed assets on which
depreciation should be claimed and allowed i.e. the actual cost paid by the
assessee for the depreciable assets acquired from Wimco Ltd. For
computing the value of the said assets, the appellant-assessee and Wimco
Ltd. had both relied upon the surveyor‟s report dated 16th January, 1990
ITA No. 190 & 191/2002 Pa ge 12 of 15
and 6th March, 1990. The said surveyor had valued all buildings, boundary
wall and other plant and equipments. The aforesaid valuation report is
detailed and elaborates and is also the basis on which Wimco Ltd. had paid
tax on the resultant transfer.
17. We note for benefit the judgment of Supreme Court in the case of
Jogta Coal Co. Ltd. vs. CIT AIR 1959 SC 1232, wherein the Supreme
Court has held as under:-
"12. The words which require to be considered are "on the
original cost thereof to the assessee". It has been held by the
Privy Council in Commissioner of Income-tax v.
Buckingham & Carnatic Co. Ltd., that the word assessee in
section 10(2)(vi) refers to the person who owns the property
in question and who is being assessed and not the
predecessor and depreciation allowance is to be based on
the original cost of such property to such person (i.e.,
assessee) and therefore the cost to be considered for the
purpose of calculating the depreciation allowance is the
original cost of the purchaser who is being assessed and not
the written down value to his predecessor. We do not think
that there is any doubt on the wording 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 Appellate Tribunal has the jurisdiction to hold that what
the appellant has actually para as the price of a particular
ITA No. 190 & 191/2002 Pa ge 13 of 15
asset is not its real price and the price paid includes the
price of some other asset which must have been
purchased."
Further, in Deputy Commissioner of Income Tax, Ahmedabad vs.
Core Health Care Ltd. [2008] 2 SCC 465, the Supreme Court has held as
under:-
"12. Section 43 groups together all provisions in the nature
of definitions or interpretations relevant to the computation
of income under the head "Profits and Gains of Business".
Section 43(1) defines "actual cost". The definition of "actual
cost" has been amplified by excluding such portion of the
cost as is met directly or indirectly by any other person or
authority. Explanation 8 has been inserted in
Section 43(1) by Finance Act, 1986 (23 of 1986), with
retrospective effect from 1.4.1974. It is important to note
that the words "actual cost" would mean the whole cost and
not the estimate of cost. "Actual cost" means nothing more
than the cost accurately ascertained. The determination of
actual cost in Section 43(1) has relevancy in relation to
Section 32(depreciation allowance);
Section 32A(investment allowance), Section 33(development
rebate allowance), and Section 41 (balancing charge).
13."Actual cost" of an asset has no relevancy in relation to
Section 36(1)(iii) of the 1961 Act. This reasoning flows from
a bare reading of Section 43(1). Section 43 defines certain
terms relevant to income from profits and gains of business
and, therefore, the said section commences with the words
ITA No. 190 & 191/2002 Pa ge 14 of 15
"In Sections 28 to 41and unless the context otherwise
requires" "actual cost" shall mean the actual cost of the
assets to the assessee, reducing by that portion of the cost
thereof, if any, as has been met directly or indirectly by any
other person or authority. In other words, Explanation 8
applies only to those Sections like
Sections 32, 32A, 33 and 41 which deal with concepts like
Depreciation. The concept of Depreciation is not there in
Section 36(1)(iii). That is why the legislature has used the
words "unless the context otherwise requires". Hence,
Explanation 8 has no relevancy to Section 36(1)(iii). It has
relevancy to the aforementioned enumerated sections.
Therefore, in our view Explanation 8 has no application to
the facts of the present case.
18. In these circumstances, we do not find any merit in the submission
made by the assessee. The question of law is accordingly answered against
the appellant-assessee and in favour of the respondent-Revenue.
The appeals are dismissed. There will be no order as to costs.
(V. KAMESWAR RAO)
JUDGE
(SANJIV KHANNA)
JUDGE
DECEMBER 22, 2014
km
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