THE COMMISSIONER OF INCOME TAX,TVM. vs. ENGLISH INDIAN CLAYS LTD.,TRIVANDRUM

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM WEDNESDAY, THE 10TH JUNE 2009 / 20TH JYAISHTA 1931 ITA.No. 150 of 2008() --------------------- ITA.156/COCH/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: -------------------- THE COMMISSIONER OF INCOME-TAX, THIRUVANANTHAPURAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI. JOSE JOSEPH, SC FOR IT RESPONDENT(S): --------------- ENGLISH INDIAN CLAYS LTD., THIRUVANANTHAPURAM. ADV. SRI.A.KUMAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/06/2009,THE COURT ON 10/06/2009 DELIVERED THE FOLLOWING:

C.R. C.N.RAMACHANDRAN NAIR & C.K.ABDUL REHIM, JJ. .................................................................... I.T. Appeal No.150 of 2008 .................................................................... Dated this the 10th day of June, 2009. JUDGMENT Ramachandran Nair, J. Appeal is filed by the Revenue against the order of the Tribunal cancelling a suo moto revisional order issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act whereunder Commissioner set aside respondent's assessment for the year 1995-96 with direction to the Assessing Officer to reconsider eligibility for deduction of depreciation of Rs.4 crores claimed by the respondent and allowed in the original assessment without considering the eligibility. Even though several questions are raised in the appeal filed, we feel the only issue which is the substantial question of law that requires consideration is whether on facts, the Tribunal was justified in setting aside the order of the Commissioner issued under Section 263 of the Act directing fresh assessment of the assessee for the year 1995-96. 2. Assessee which is engaged in mining of clay as it's main

2 business in Trivandrum filed it's return for the assessment year 1995-96 claiming full depreciation of Rs.5 crores under two heads. Out of this, Rs.1 crore represent the value of aluminium cops, each priced at Rs.50/-, purchased and leased out by the assessee to a yarn manufacturing company by name JCT Ltd. Balance Rs.4 crores represent value of bottles and crates (PVC made) purchased and leased by the assessee to a soft drinks company by name Dhillon Kool Drinks and Beverages Ltd. The details available in the Tribunal's order show that Rs.4 crores' claim represents value of 5161287 number of bottles, each bottle costing a price of around Rs.6 and 46507 numbers crates, the value of each crate being around Rs.150/-. While completing regular assessment under Section 143(3) of the Act, the Assessing Officer considered the claim of depreciation of the assesee only for Rs.1 crore pertaining to purchase and lease out of aluminium cops to JCT Ltd. The officer found that the purchase was under two invoices dated 23.3.1995 and 30.3.1995 and lease during the previous year was only for purchases under two bills. He, therefore, granted depreciation of Rs.12.5 lakhs and disallowed the claim which was Rs.1 crore. So far as the claim of depreciation of Rs.4 crores pertaining to purchase and supply of bottles and crates to the Soft Drinks Company

3 abovereferred is concerned, the assessment is completely silent which shows that assessee's claim of depreciation in terms of the return was allowed by the officer without reference to it in the assessment order. The Commissioner of Income Tax in exercise of jurisdiction conferred under Section 263 of the Act, considered the correctness of the claim with reference to the records. He found that the very same assessee made a bogus claim of depreciation in the immediately preceding assessment year pertaining to purchase and lease out of aluminium cops to a company and C.I.T.(Appeal)'s finding about the bogus nature of transaction was accepted by the assessee and assessee settled the tax liability under the Karvivad Samadan Scheme for that year. Therefore, the Commissioner was of the view that the assessee's claim for depreciation of a big amount of Rs.4 crores should have been considered carefully by the Assessing Officer. The Commissioner noticed that without even a reference in the assessment order about the claim, the Assessing Officer allowed depreciation on the entire amount of Rs.4 crores without examining the details of the claim or eligibility of the assessee. Since the assessment order was passed in a cursory and indifferent manner granting deduction of Rs.4 crores without examining in detail the nature of the claim, the Commissioner found

4 that such an order is prejudicial to the interest of the Revenue and so much so, it calls for re-examination. He, therefore, set aside the assessment under Section 263 and directed the Assessing Officer to reconsider the assessee's eligibility for claim of depreciation of Rs.4 crores. The appeal filed by the assessee was allowed by the Tribunal by holding that Commissioner has not established disentitlement on merits and, therefore, he was not entitled to set aside the assessment in exercise of powers under Section 263 of the Income Tax Act. It is against this order the department has filed this appeal and we have heard Senior Counsel appearing for the department and Advocate Sri.A.Kumar, appearing for the respondent-assessee. 3. In the first place, Standing Counsel pointed out the background of the assessee and the nature of the claim. During the preceding assessment year i.e. 1994-95, assessee made a similar claim of depreciation on the items purchased and leased out to one company by name JCT Ltd. which was found by the C.I.T.(Appeals) as a bogus transaction. The assessee without pursuing the matter for that year, settled the tax liability under the Karvivad Samadhan Scheme. During this year also, the assessee claimed full depreciation on the value of Rs.2 lakhs aluminium cops purchased from JCT Ltd. and leased out to

5 the same company with whom a bogus transaction was established by the department for the previous year. Therefore, the Assessing Officer scrutinised the genuineness of the claim of depreciation in respect of the transaction with JCT Ltd. and limited the depreciation to Rs.12,50,000/- as against Rs.1 crore claimed by the assessee. In other words, 87.5% of the depreciation claimed for the transaction with JCT Ltd. was rejected by the Assessing Officer. However, so far as the assessee's claim for depreciation on the purchase and sale of bottles and crates to M/s.Dhillon Kool Drinks and Beverages Ltd. is concerned, though the claim was Rs.4 crores, the Assessing Officer does not even whisper about the claim in the assessment order, but granted the claim without examining the assessee's eligibility for the claim. In fact, the claim is that the assessee purchased 51,61,287 number of bottles and 46,507 numbers of crates and gave the same on lease to the above company. According to the assessee, value of each item is below the limit that entitles the assessee for full depreciation and based on the same claim was made. In the normal course a prudent officer should examine whether there was genuine purchase and lease as claimed by the assessee. Even though assessee's counsel contended that all the details were furnished by the assessee along with return and statement

6 of accounts and the Assessing Officer should be deemed to have considered the same before allowing the claim, the finding of the Commissioner in this regard is as follows: "I find from the records that the assessee furnished certain details like the names of the parties from whom these assets were purchased and the cost of the items. However the addresses of these parties were not mentioned and the assessing officer did not make any attempt to verify the genuineness of the lease transaction or even the purchase of the assets from various parties at a cost of nearly 4 crores." It is obvious from the above finding of the Commissioner that based on the records produced by the assessee, that too, without addresses of the parties from whom the assessee purchased the articles, the Assessing Officer would not have allowed the claim had he scrutinised the return and the records filed in support thereof. During hearing, even though assessee's counsel filed detailed argument note and offered to produce entire records pertaining to the purchases to prove genuineness of the claim, we do not think it is for this court to consider the matter for the first time. The only question to be considered is whether the order issued by the Assessing Officer granting the claim without examining the eligibility of the assessee for the claim is an order prejudicial to the interest of the Revenue entitling the Commissioner to interfere under Section 263. In this regard, we are unable to uphold the finding of the

7 Tribunal that the Commissioner has not established that the assessment is prejudicial to the interest of the Revenue before setting aside the same. The finding of the Commissioner in his order is that the assessment was passed granting depreciation of about Rs.4 crores without even verifying whether the purchases are genuine, particularly when assessee has not even furnished the addresses of the parties from whom the goods are purchased. If the procedure adopted by the Assessing Officer is not fair and reasonable, then there is nothing wrong in the Commissioner directing to examine the assessment afresh in exercise of powers under Section 263, no matter such assessment would lead to increased demand of tax or not. The assessee has made a bogus claim of depreciation in the assessment year 1994-95 and the same was detected by the C.I.T.(Appeals). The assessee in fact, conceded guilty by settling liability under Karvivad Samadhan Scheme. In this year also, assessee had an arrangement with the very same party and the Assessing Officer made substantial disallowance of claim in respect of the transaction with the very same party. Therefore, it was the duty of the Assessing Officer to examine critically similar claim put forward by the very same assessee that is, the claim of depreciation of Rs.4 crores. We are, therefore, of the view that in this case the

8 assessment passed without reference to the claim and without considering the eligibility of the assessee for depreciation for the lakhs of items said to have been purchased and leased out in the previous year, was rightly found to be an order prejudicial to the interest of the Revenue by the Commissioner. So much so, the Commissioner rightly exercised jurisdiction under Section 263 and set aside the assessment. We, therefore, allow the appeal by reversing the order of the Tribunal and by restoring the order of the Commissioner. It will be open to the assessee to produce evidence and establish the case before the officer in the fresh assessment proceedings based on order of the Commissioner. C.N.RAMACHANDRAN NAIR Judge C.K.ABDUL REHIM Judge pms