AJIT, K.SENGUPTA, J. - (1.) IN this reference under S. 256(1) of the IT Act, 1961 for the asst. yrs. 1976-77 and 1982-83 the following common question of law has been referred to this Court : "Whether, on the facts and circumstances of the case, and in view of the agreement dt. 25th Aug., 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. 3,50,000 originally fixed ?"
(2.) THE facts leading to this reference are that the assessee is a limited company deriving income from business of running on oil mill. In the relevant period Sri 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. ,50,000 as per agreement dt. 31st July, 1975. Subsequently, additional amount of Rs. 1,20,000 was further paid by the assessee to Sri B.K. Chandra as per the valuation report dt. 30th Sept., 1975 and second agreement dt. 6th Oct., 1975. In the asst. yr. 1976-77 the assessee-company claimed depreciation taking WDV of the machinery purchased at Rs. 4,70,000. The ITO took the view that real cost of plant and machinery was Rs. 3,50,000 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 Expln. 3 to S. 43 and took the WDV at Rs. 3,50,000 for the purpose of depreciation. The assessee filed appeal before the CIT(A) against the above order. The CIT(A) in the asst. yr. 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 Plants and Machinery and other assets. The ITO 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 Expln. 3 of S. 43(1) 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 in 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 dt. 25th Aug., 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 31st July, 1975 and the assets were given delivery and taken possession of accordingly w.e.f. 31st July, 1975. Later at the request of the assessee the costs of the assets were revalued at a total value of Rs. 4,70,000.00 according to the valuation dt. 20th Sept., 1975 by a Chartered Engineer. Another agreement dt. 6th Oct., 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 to S. 1,20,000 that the ITO refused to allow the depreciation allowance. Having carefully considered the submissions and the facts and the circumstances of the case, I hold that the ITO 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 dt. 25th Aug., 1975 for 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 dt. 25th Aug., 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. In the facts and circumstances of the case, the disallowance of depreciation allowance made by the ITO on the sum of Rs. 1,20,000 is upheld. On further appeal by the assessee against the order of the CIT(A), 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 : "8. 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 asst. yr. 1982-83 the ITO again calculated depreciation taking cost of the plant and machinery at Rs. 3,50,000. The CIT(A) confirmed the action of the ITO but the Tribunal directed that the depreciation should be allowed taking cost at Rs. 4,70,000. 3. None appeared for the assessee in this case. Mr. Murarka, learned Advocate as amicus curiae has rendered assistance in this. We record our appreciation for such assistance.
(3.) OUR attention has been drawn to the two agreements. The first agreement is dt. 25th Aug., 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 6th Oct., 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 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 dt. 3rd Oct., 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 (Rupees Four lacs and seventy thousand only) and the purchaser shall satisfy the balance consideration of Rs. 1,20,000 (Rupees one lac and twenty thousand only) 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." ;