DCIT CEN CIR 8(2), MUMBAI vs. DORF KETAL CHEMICALS (I) P.LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D” MUMBAI

BEFORE SHRI RAVISH SOOD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER)

ITA No. 4683/MUM/2017 Assessment Year: 2004-05 & ITA No. 4682/MUM/2017 Assessment Year: 2005-06

Dy. CIT, CC-8(2), 6th floor, Room M/s Dorf-Ketal Chemical (I) No. 658, AayakarBhavan, M.K. Vs. Pvt. Ltd. Drof Ketal Towers, Road, Mumbai-400020. D’Monte Lane, Oriem, Malad (W), Mumbai-400064. PAN No. AAACD3819P Appellant Respondent

Revenue by : Mr.Rajesh Ojha, & Assessee by : Mr. Nilesh Patel, AR

Date of Hearing : 23/07/2019 Date of pronouncement: 18/10/2019

ORDER PER N.K. PRADHAN, AM The captioned appeals filed by the Revenue are directed against the order passed by the Commissioner of Income Tax-(Appeals)-50, Mumbai [in short the ‘CIT(A)’] and arise out of the penalty levied u/s 271(1)(c) of the Income Tax Act 1961, (the ‘Act’). Facts being identical, we begin with the AY 2004-05.

2 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 2. The grounds of appeal filed by the revenue read as under :

(i) On facts and circumstances of the case and in law the Id CIT(A) erred in deleting the penalty levied on account of confirmation of quantum addition regarding disallowance of additional depreciation claimed in the return u/s 153A vis-a-vis the claim made in the return u/s 139(1) disregarding the fact that the additional depreciation based on regrouping of assets was never claimed in the original return and in spite of the quantum addition being confirmed by the CIT(A). (ii) On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty levied on account of confirmation of quantum addition regarding disallowance of additional depreciation claimed in the return u/s 153A vis-a-vis the claim made in the return u/s 139(1) disregarding the fact that the assessee has withdrawn the claim of depreciation based on regrouping of assets in the Statement of Facts filed before the Settlement Commission for A. Y 2007-08 and A. Y 2008-09.

A search u/s 132(1) was conducted on 30.05.2008 in the business and office premises of Dorf Ketal group. As a result of the search, the group declared undisclosed income of Rs.7.54 crores for various assessment years in the hands of the company and its directors and

3 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 their spouses in addition to the regular income. Consequently, the assessee filed return of income on 12.02.2009 in response to notice u/s 153A dated 14.11.2008 issued and served by the AO. In the order u/s 143(3) r.w.s. 153A dated 30.12.2010, the AO arrived at a total income of Rs.6,85,90,913/-. The AO also initiated penalty proceedings u/s 271(1)(c) of the Act.

Let us put simply the issue in dispute. In the return of income filed u/s 139, it was the contentions of the assessee that the claim of depreciation was not correct in as much as the groupings of the assets for the purpose of claiming depreciation were not correct, whereas while filing returns u/s 153A, the assets were regrouped and depreciation was re-computed which resulted in higher depreciation for AY 2004-05.

During the course of penalty proceedings, the AO issued a show cause notice dated 02.01.2013 to the assessee asking it to explain as to why penalty u/s 271(1)(c) should not be imposed. In response to it, the assessee vide letter dated 14.03.2013 replied as under :

“We would like to state that we have preferred to file an appeal with ITAT for the grounds which were not decided in our favour in the CIT(A) order dated 29.02.2013.”

However, the AO was not convinced with the above explanation of the assessee and observed that section 271(1)(c) is attracted when the AO is satisfied that any person has concealed the particulars of his income or has furnished inaccurate particulars of such income. Relying

4 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 on the judgment of the Hon’ble Delhi High Court in CIT v. Zoom Communication Pvt. Ltd. 191 Taxman 179 (Del), the AO held that the assessee had concealed particulars of its income to the extent of Rs.75,80,338/-. Thus, he levied a minimum penalty of Rs.27,20,000/- u/s 271(1)(c) on the above concealed income.

“7.1 I have gone through the penalty order. I have also considered the submissions of the appellant. The CIT(A) held that the revised claim of depreciation is not admissible because the issue had attained finality prior to initiation of the search. Thus, the claim was disallowed by CIT(A) on technical ground there was no finding by the CIT(A) that the claim itself was wrong per se. The AO had also disallowed the claim on the ground that claim was not verifiable. The appellant submitted that from A.Y. 2006-07 onwards, the appellant was following the revised groupings for the purpose of computation of the depreciation. For the A.Y. 2006-07, the appellant had claimed the depreciation on the basis of revised grouping in the original return filed u/s 139. The AR submitted that when the notice u/s 153A was issued for A.Y. 2004-05, the appellant claimed depreciation on the basis of the new groupings of the assets in its return. On going through the statement of the regrouped assets and depreciation, I find that the claim cannot be considered mala fide in as much as the claim was neither absurd nor without any basis. Therefore, in my view, the AR of the appellant has been able to prove that the claim was bona fide. The AO had disallowed the claim on the ground that claim was not verifiable. The CIT(A) held that the revised claim of depreciation is not admissible because the issue had attained finality prior to initiation of the search. Thus, the claim was disallowed by CIT(A) on

5 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 technical ground there was no finding by the CIT(A) that the claim itself was wrong per se.

7.2 I also find that the facts of the case of CIT vs. Zoom Communication Private Limited on which the AO relied are different from this case. In the case of Zoom Communication Private Limited, the chance of the return being picked up for scrutiny was very low as observed by the Hon'ble Court. But in the present case, the appellant was aware of the fact that the return would be necessarily scrutinized as per the provisions of section 153A and, therefore, the principle on the basis of which the penalty was upheld is not applicable in this case.

7.3 Further, the observation of the AO that whenever there is a difference between the returned income and assessed income, there is an inference of concealment is not correct. As per the provisions of section 271(1)(c), where a claim is disallowed, the assessee is deemed to have concealed/file inaccurate particulars of income only if he fails to establish that the claim was bona fide.

7.4 In cases, where appellant is unable to substantiate the claim, penalty can be imposed only if the appellant fails to prove that the claim was bona fide. In this case, the appellant has been able to establish that the claim was bona fide.”

6 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 documentary evidence in support of its claim. Thus the Ld. DR submits that the order passed by the CIT(A) be set aside and the one passed by the AO be restored.

Also the Ld. counsel file another P/B containing case laws in support of his contention that fresh claim can be made in the return filed u/s 153A [DCIT v. Eversmile Construction Company (P) Ltd. [2013] 33 taxmann.com 657 (Mumbai-Trib)] ; that excess or wrong claim of depreciation by itself does not attract penalty [CIT v. Somany Evergreen Knits Ltd. [2013] 35 taxmann.com 529 (Bombay HC), CIT v. Brahmaputra Consortium Ltd. [2011] 12 taxmann.com 486 (Delhi HC), CIT v. Manibhai & Bros [2007] 294 ITR 501 (Gujarat HC), ITO v. Vaidangi Techno Management Consultants (P) Ltd. [2017] 88 taxmann.com 832 (Jaipur- Trib) (UO) and DCIT v. Apollo Hospitals Enterprise Ltd. [2013] 35 taxmann.com 196 (Chennai-Trib)] ; that disallowance of expenditure/deduction cannot automatically lead to penalty [CIT v. Reliance Petroproducts (P) Ltd. [2010] 322 ITR 158 (SC)] ; that mere confirmation of disallowance in quantum appeal cannot invite penalty [ACIT v. VIP Industries Ltd. [2009] 30 SOT 254 (Mumbai)] ; that simply because the assessee did not challenge the addition/disallowance in quantum appeal cannot lead to penalty [CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka HC), Rai Industrial Power Pvt. Ltd. v. DCIT ITA No. 4862/Del/2013 (Delhi-Trib)];

7 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 that voluntary withdrawal of depreciation claim cannot invite penalty [Waman Hari Pethe Sons Private Ltd. v. DCIT ITA No. 2730/Mum/2016 (Mumbai-Trib)]; that later or subsequent events do not affect imposition of penalty [Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka HC), HPCL Mittal Energy Ltd. v. Addl. CIT [2018] 97 taxmann.com 3 (Amritsar-Trib) (Third Member)] ; that satisfaction and reasons for levy of penalty as recorded in the notice u/s 274 and the penalty order, must be clear and unambiguous [Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka HC), HPCL Mittal Energy Ltd. v. Addl. CIT [2018] 97 taxmann.com 3 (Amritsar- Trib) (Third Member), Shri Swami Saran Garg v. ITO ITA No. 4549/Del/2011 (Delhi-Trib)].

6.1 The Ld. counsel further submits that full disclosure of the fresh(revised) claim of depreciation was made by the assessee. Elaborating further, it is stated by him that (i) while filing return u/s 153A, the assessee had filed a note, disclosing the fresh (revised) claim of depreciation made on the basis of re-grouping of certain assets, (ii) even the AO was made aware of the revised claim of depreciation and re-grouping of assets and (iii) the re-grouping of assets and revised claim of depreciation was based on Appendix I r.w. Rule 5 of the IT Rules and section 32 of the Act.

The Ld. counsel further explains that nothing incorrect or inaccurate or wrong was found by the AO about the fresh (revised) claim of depreciation. Explaining further, it is stated by him that (i) the original assessment u/s 143(3) was passed on 23.11.2006 but nothing

8 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 objectionable was found about the assets on which depreciation was claimed, (ii) even during search action on 30.05.2008 nothing objectionable was found about the assets on which depreciation was claimed, (iii) the AO has not stated either in the assessment order or in the penalty order, why and how the fresh claim of depreciation made in the return u/s 153A, on the basis of re-grouping of certain assets was wrong, (iv) the AO has nowhere alleged that re-grouping of assets was not accurate, (v) in the present case the basic objection of the AO and CIT(A) is that the assessee could not make the fresh (revised) claim of depreciation in the return u/s 153A, otherwise nothing incorrect or inaccurate about such claim was found.

The Ld. counsel also submits that at best the issue was debatable or two views could be had about it or it involved difference of opinion. It is stated that the assessee filed return u/s 153A on 12.02.2009. At the date of filing that return, there was nothing (no provision in the Act or any adverse judicial precedents or adverse clarification by CBDT) which prohibited the assessee from making a fresh claim in the return u/s 153A. So the issue whether a fresh or new claim could be made in return u/s 153A was open when return was filed. It is thus argued by the Ld. counsel that at best one can say that the issue was debatable or that two views could be had about it or it involved a difference of opinion. Reliance is placed by him on the decision in CIT v. Petals Engineers (P.) Ltd. (2014) 42 taxmann.com 433 (Bom) and CIT v. Harshvardhan Chemicals & Mineral Ltd. (2003) 259 ITR 212 (Raj) in support of the

9 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 proposition that when two views are possible or debatable issue is involved, then penalty cannot be imposed.

Further, it is submitted that the claim of the assessee was bona fide on the ground that it was consistent in claiming depreciation even for later years (AYs 2006-07, 2007-08 and later years) on the basis of revised (lower) WDV which was lower for those later years. So, even though the assessee could claim lower (than the claim based on original WDV), it followed a consistent approach. It is argued that nothing mala fide was found about the revised claim of depreciation.

Further, it is stated that nothing adverse was found by the Department or the AO that led the assessee to withdraw its claim of revised depreciation. Elaborating it, the Ld. counsel explains that the assessee challenged the order of the CIT(A) before the ITAT, however, later the assessee withdrew the second appeal (before the ITAT) on quantum addition (on revised claim of depreciation) vide letter dated 04.03.2015 stating that (i) the assessee is under a bona fide belief that it could make a fresh claim/revision in the return filed u/s 153A, (ii) but the assessee did not wish to press the ground (of revised depreciation) to buy peace of mind and avoid litigation cost and (iii) the claim of depreciation is a mere timing difference issue and it would not have an overall tax impact.

Thus it is stated that a letter dated 15.06.2015 was filed before the ITAT requesting for withdrawing the appeal. In response to it, the ITAT granted permission to the assessee to withdraw the appeal and passed withdrawal order on 15.06.2015.

10 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 Relying on the decision in CIT v. Vasanth K. Handigund (2010) 327 ITR 233 (Karn), the Ld. counsel submits that when addition is accepted to buy peace and to avoid litigation, penalty is not attracted.

Regarding the withdrawal of depreciation based on re-grouping of assets before the Settlement Commission, the Ld. counsel submits that (i) there was a survey u/s 133A on 30.05.2013. During survey no adverse fact was found about the revised or fresh claim of depreciation, (ii) when notices u/s 148 (post survey) were issued, the assessee filed on 14.10.2015 an application before the Settlement Commission for AYs 2007-08 to 2014-15, (iii) consequent to withdrawal of appeal before ITAT for AYs 2004-05 and AY 2005-06, the assessee re-worked its claim of depreciation for AY 2007-08 to AY 2014-15 before the Settlement Commission and as a result, the revised claim of depreciation on the basis of re-grouping of assets stood withdrawn.

The Ld. counsel submits that the penalty proceedings are separate and distinct from the assessment proceedings. Stating that just because the quantum assessment is upheld in appeal, it does not mean that penalty is leviable.

Further relying on the decision in CIT v. Atul Mohan Bindal (2009) 317 ITR 1 (SC) and UoI v. Rajasthan Spinning & Weaving Mill (2009) 180 Taxman 609 (SC), the Ld. counsel explains that the contention of the AO that wherever there is a difference between the returned and assessed income, there is an inference of concealment as a rule, is not a correct contention.

11 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 Finally, the Ld. counsel submits that the decision in the case of Zoom Communication Pvt. Ltd. (supra) relied on by the AO is distinguishable from the instant case on facts.

We may mention here that the case laws relied on by the Ld. counsel in respect of the satisfaction in notice u/s 274 does not arise from the instant appeal and also the fact remains that no cross objection has been filed by the assessee.

The point in dispute herein is the claim of additional depreciation amounting to Rs.75,80,338/- by the assessee on account of re- classification of certain assets resulting in change of rate of depreciation disclosed in the return of income filed u/s 153A of the Act vis-à-vis the return filed u/s 139(1) of the Act. Before the Income Tax Settlement Commission, Mumbai, (ITSC) the assessee had filed an application and disclosed ‘Depreciation’ as under :

“10. Issue No. 8-Depreciation

Regrouping of assets

10.1 The applicant begs to submit that as stated in Annexure C, there was search and seizure in the premises of the Applicant on 30 May 2008, and consequently for AY 2003-04 to AY 2008-09 notices under section 153A of the Income Tax Act was issued requiring Applicant to file the return of income under the Act.

12 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017

10.2 The applicant while filing the return of income under section 153A of the Act for the AY 2004-05 to AY 2009-10 had re-grouped/reclassified its assets to the correct rate of depreciation which had resulted in the excess depreciation claim of Rs.1,23,51,251/- for AY 2004-05 to AY 2006-07.

10.3 However the said revised claim of depreciation was not accepted by the assessing officer or CIT(A) and the issue relating to the same was pending before ITAT for the AY 2004-05 to AY 2006-07. However, considering the fact that the issue of depreciation was pending before ITAT, Applicant had continued to claim depreciation on the basis of asset regrouped by it for the subsequent years also i.e. AY 2007-08 to AY 2014-15.

10.4 Be that as it may, now the applicant has withdrawn the appeal before ITAT for AY 2004-05 and AY 2006-07 in connection with regrouping of the assets to buy peace of mind and avoid further litigation, since the claim of depreciation is merely a timing difference.

10.5 Consequent to the withdrawal of the appeal filed before ITAT, Applicant submits that the depreciation for the years AY 2007-08 to AY 2014- 15 would undergo change since the depreciation would need to be calculated based on the closing WDV for AY 2006-07.

10.6 The applicant has therefore now reworked the correct claim of depreciation for the AY 2007-08 onwards based on the correct WDV of AY 2007-08.

10.7 Due to the correct claim of depreciation consequent to the withdrawal of ground relating to the Depreciation on the regrouping of the assets before the ITAT for the AY 2004-05 to AY 2006-07, there is a consequential impact resulting in additional claim of depreciation of Rs.42,89,617/- for AY 2007-08 to AY 2014-15.”

13 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 7.1 Based on the recommendation of the Wanchoo Commission, the Central Government constituted Settlement Commission. It provides an easy solution to taxpayer to come out clean by offering the taxable income for assessment.

In the order u/s 245D(2C) dated 10.12.2015 by the ITSC, as per the first application the assessee has offered Rs.17,70,765/- towards adjustment in depreciation pursuant to withdrawal of claim of re- grouping of the assets, whereas as per the subsequent application it has offered (-) Rs.42,89,617/-.

7.2 The ITSC held the application as invalid u/s 245D(2C) on the ground that there has been no true and full disclosure by the applicant and also it failed to explain the manner of deriving such additional income.

7.3 As mentioned hereinabove, the assessee while filing the return of income u/s 153A of the Act for AY 2004-05 to AY 2009-10 had regrouped/reclassified its assets to the rate of depreciation which had resulted in the excess depreciation claim of Rs.1,23,51,251/- for AYs 2004-05 to 2006-07. In the instant case, we are concerned with AYs 2004-05 and 2005-06. The application filed by the assessee has since been rejected by the ITSC u/s 245D(2C) of the Act, treating it as invalid.

7.4 In the case of Jain Bros v. UoI (1970) 77 ITR 107, 116 (SC), it is held that although penalty has been regarded as an additional tax in a certain sense and for certain purposes, it is not possible to hold that

14 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 penalty proceedings are essentially a continuation of the proceedings relating to assessment where a return has been filed.

In CIT v. Chetan Dass Lachman Dass (1995) 214 ITR 726, 729 (Del), it is held that for all practical purposes, proceedings for imposition of penalty, though emanating from proceedings for assessment, are independent aspects of the proceedings.

In CIT v. J.K. Synthetics Ltd. (1996) 219 ITR 267, 270 (Del), it is held that as the proceedings for imposition of penalty and assessment proceedings are two separate and independent proceedings, separate and distinct provisions have been enacted in the statute for initiation of the same.

7.5 As mentioned earlier, during the course of assessment proceedings the assessee claimed additional depreciation of Rs.75,80,338.16/- [Rs.2,14,87,143.57/- in original return and Rs.2,90,67,481.73/- in revised return] for AY 2004-05. Similarly, it claimed excess depreciation of Rs.50,15,075.38/- [Rs.2,34,87,380.03/- in original return and Rs.2,85,02,455.40/- in revised return].

As per the assessee, the additional depreciation of Rs.75,80,338.16/- in A.Y. 2004-05 is because of the following:

15 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 3. In A.Y. 2003-04, Stabilizer was grouped from Block III of Plant and Machinery to Block VI of computers. This has resulted in increase in depreciation by Rs.5,22,671/-. 4. Depreciation has been claimed on Motor Car Block @ 25% instead of eligible @ 20%. This has resulted in decrease in depreciation by Rs.351,960/-. 5. Depreciation has been claimed on Office Equipments and Furniture and Fixture as eligible @ 15% instead of 10% which has claimed earlier. This has resulted in increase in depreciation by Rs.1,18,162/- and Rs.2,89,345/-. 6. Regrouping in AY 2003-04, in Block of Factory Building has resulted in decrease in depreciation of Rs.49,795/-. 7. Earlier claim includes Depreciation on R & D block which has not been claimed in the revised return of Rs.48,319/-.

During the course of assessment proceedings, the AO asked the assessee to file full details in respect of the above excess claim of depreciation. But the assessee failed to furnish the relevant documents on the above. In a situation like the present one, the assessee had to file the relevant documents/evidence from which the AO could have drawn correct inference. The assessee failed to do so. As a logical corollary, the burden cannot be shifted to the Department. The burden of proof rests with the assessee.

Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a de novo order after giving

16 M/s Dorf-Detal Chemical ITA Nos. 4683 & 4682/Mum/2017 reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence regarding the claim of additional depreciation of Rs.75,80,338.16/- on account of reclassification of certain assets during the year under consideration.

As the matter has been restored to the file of the AO, we are not adverting to the case laws relied on by both sides.

Facts being identical, our decision for the AY 2004-05 applies mutatis mutandis to AY 2005-06.

Order pronounced in the open Court on 18/10/2019

Sd/- Sd/- (RAVISH SOOD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai;

Dated: 18/10/2019 Rahul Sharma, Sr. P.S.

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai