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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
PER G.S. PANNU, VICE PRESIDENT :
The captioned appeal by the assessee is directed against the order of the CIT(A)-8, Mumbai dated 28.12.2015 pertaining to the Assessment Year 1997-98, which in turn, has arisen from an order passed by the Assessing Officer dated 29.04.2014 under section 271(1)(c) of the Income Tax Act, 1961 (in short 'the Act').
In this appeal, the solitary grievance of the assessee is against the action of the income tax authorities in imposing penalty under section 271(1)(c) of the Act amounting to `1,27,71,000/-. The penalty has been imposed with M/s. Meecon Ltd. respect to the tax sought to the evaded qua the depreciation claim of `1,06,42,500/- on leased asset which was disallowed during the assessment proceedings. The manner in which the disallowance was made is quite relevant and can be summarised as follows.
Briefly put, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of barge operations, consultancy and hiring and lease of assets. It filed its return of income for Assessment Year 1997-98 on 28.11.1997 declaring an income of `1,16,41,500/-, which was revised to `1,17,83,040/- on 17.07.1998. The assessee claimed depreciation of `1,06,42,500/- at the rate of 100% on 3 steam boilers stated to have been leased by it to one, M/s. SOL Ltd., New Delhi. In the course of assessment proceedings finalised u/s 143(3) of the Act on 01.02.2000, the assessee filed the lease agreement, invoices for purchase of steam boilers from M/s. Chemcom Industries which is a proprietary concern of one Mr. Rajesh Grover and details of payments made to M/s. Chemcom Industries and deposit received from M/s. SOL Ltd. In support, assessee also filed ledger copies of M/s. Chemcom Industries, M/s. SOL Ltd. and lease hire charges received from M/s. SOL Ltd. The Assessing Officer issued summons to enquire the genuineness of purchase and lease of equipment (3 boilers), which were returned unserved as the said parties were not available. Assessee sent its internal auditor Mr. Chetan C. Shah, Chartered Accountant who visited factory of M/s. SOL Ltd. to verify the existence of the leased asset and genuineness of the lease transaction. The factory was locked as the official Liquidator, Delhi had taken the possession of the assets of the company. On enquiry, the Assistant liquidator produced for inspection, a valuation report dated 31.12.1996 prepared by M/s. Potdar
M/s. Meecon Ltd. Consultants wherein the equipment was mentioned at Item No.1 (of the Ghee section) of the said report and also valuation report of M/s. Chopra & Chopra dated 24.06.1999 wherein equipment was at item No.5 (of Ghee section) of the report. On basis of documents produced by the official Liquidator, Mr. Chetan C. Shah prepared an affidavit dated 04.01.2000 recording all the above, which was submitted to the Assessing Officer, which was not accepted by the Assessing Officer, as according to him, Mr. Chetan C Shah had no locus standi. The Assessing Officer vide his order u/s. 143(3) dated 01.02.2000 held the lease transaction to be not genuine primarily on the ground that the manufacturer of the equipment and lessee were non- existent. Accordingly, he disallowed depreciation of `1,06,42,500/- claimed on such leased assets. Notably, while completing the assessment, the Assessing Officer also noted that if his stand of treating the lease arrangement as non-genuine is not upheld, even then the depreciation deserves to be disallowed as the lease arrangement was in the nature of a finance lease. Before the CIT(A), the assessee filed the letter addressed to Official Liquidator and market quotation of M/s. SOL Ltd. It also relied on Civil Application no. 1273/2000 before High Court of Delhi made by assessee-company seeking direction to the Official Liquidator of M/s. SOL Ltd. to confirm that the Boilers mentioned in the Lease Agreement are in his possession. The CIT(A), however, noticing certain discrepancies, rejected the submissions and confirmed the action of Assessing Officer.
Before the ITAT, assessee filed additional evidence and the ITAT vide order dated 11.04.2005 admitted the same and the matter was restored to the file of Assessing Officer for fresh consideration. Assessing Officer by his order u/s. 143(3) r.w.s. 254 relied on the findings of earlier order of CIT(A) (which
M/s. Meecon Ltd. was set aside in first round) and again confirmed the addition without giving any specific finding on the fresh evidence and rather stating that fresh evidence also goes against the assessee. The Ld.CIT(A), however, after examining the reports relied on by assessee, gave a finding that the assets stated in valuation report of M/s. Potdar Consultants are not same as specified in purchase invoices and lease deed. He, thus, confirmed the order of Assessing Officer. On further appeal by the assessee before the Hon’ble ITAT, the Hon’ble ITAT relying on the decision of Special Bench of ITAT Mumbai in the case of Indus Ind Bank 135 ITD 165 (Mumbai) upheld the disallowance of depreciation on Boilers. The relevant para of the ITAT order in quantum proceedings is reproduced hereunder:
“6.5 All this indicate that the assessee has not entered into either financial lease or operating lease and the entire transaction in March 1997 was only to claim depreciation on boilers at 100%, which may be existing old/renovated assets of M/s. SOL Ltd. In the schedule of Plant and Machinery, which were not issued for any production (as per the report). Since the genuineness of lease transaction was not established the claim of depreciation cannot be allowed. 6.6 The Special Bench of ITAT in the case of Indus Ind Bank 135 ITD165 (Mumbai) has considered similar facts and held as under: “7.10 The law permits tax planning and not tax avoidance. If within the four corners of law a person arranges its affair in such a way that his overall tax liability is reduced, there cannot be any embargo on such tax planning. If however dubious means are adopted to reduce the incidence of tax by artificially inflating expenses or reducing income, it cannot be described as anything other than tax avoidance. The law permits only tax planning and not tax avoidance. When we consider the reality of the situation in the present case, it becomes abundantly manifest that a simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the explorer. We, therefore, refuse to accept the very genuineness of the so called lease agreement itself and hold that it is not even a case of finance lease. In our considered
M/s. Meecon Ltd. opinion, the authorities below were fully justified in refusing to grant depreciation to the assessee in both the years under consideration.
In view of the above discussion, we answer question no.1 in negative by holding that the agreement in question cannot be called as a financial lease agreement. It is so for the reasons discussed above that it is a simple case of advancing of loan by the assessee to the lease and the so called lease agreement, in the facts and circumstances of the present case, has been attempted to be used as a device to reduce tax liability of assessee. Accordingly, the second question is also answered in negative by holding that the assessee lessor is not entitled to depreciation.
We, therefore, sum up our conclusion as under:- (i) If the conditions as laid down in the judgments of Asea Brown Boveri Limited (supra) and Association of Leasing & Financial Services Companies (supra) are satisfied in a lease agreement, it will be a case of finance lease and not operating lease.
(ii) Only the lessee can be treated as owner of the asset in case of a finance lease. It is he who is entitled to claim depreciation as per law. No depreciation can be allowed to the lessor in such a case of a genuine finance lease.
(iii) The facts and circumstances of the present case show that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers. There was, in fact, no genuine leasing of boiler, neither operating nor finance. In that view of the matter also no depreciation is admissible to the assessee-lessor.”
6.7 Respectfully, following the same, we hold that the transaction is neither operating lease not financial lease. Therefore, the claim of depreciation cannot be allowed. In the course of arguments when questioned why only six days lease was offered, Ld. Counsel fairly admitted that assessee may be entitled for 50% of the depreciation claim as per the provisions. In case, at any point of time, the findings given by us in this order are to be modified, as the claim before Hon’ble Delhi High Court in M/s. Meecon Ltd. liquidation proceedings seems pending, then assessee is entitled for only 50% of the depreciation claim and not full, as the assets are used for less than 180 days during the year. In fact, the usage of asset admittedly by lessor is itself doubtful, but as assessee offered lessee rent to that extent usage issue is not material as per the judicial pronouncements on the issue of ‘use’. With these observations, the ground 1 is accordingly rejected.”
The order of the Hon’ble ITAT has become final, as stated by the learned Representative before us. Subsequently, the Assessing Officer vide an order dated 29.04.2014 (supra) held the assessee guilty of default under section 271(1)(c) of the Act as he treated the assessee of having furnished inaccurate particulars of income qua the disallowance of depreciation claimed at `1,06,42,500/-. Accordingly, the Assessing Officer imposed penalty under section 271(1)(c) of the Act of `1,27,71,000/-, which was equivalent to 300% of the tax sought to be evaded on the addition of `1,06,42,500/- made to the returned income. This action of the Assessing Officer has since been affirmed by the CIT(A) also and, accordingly, the assessee is in further appeal before us.
Before us, the primary argument of the Ld. Counsel for the assessee is that the lower authorities have erred in imposing a penalty under section 271(1)(c) of the Act because the assessee has made complete disclosure of facts and submitted all supporting material in the form of lease agreement, invoices for purchase of steam boilers, installation certificate, affidavit of Chartered Accountant to substantiate the claim of depreciation, etc. Further, the claim of depreciation was duly reflected in the return of income and the Boilers were also reflected in the financial statements of the assessee. The Ld. Counsel for the assessee submitted that assessee could not establish the physical existence of the Boilers, which is the main grievance of the Assessing Officer, due to the fact that M/s. SOL Ltd. is under liquidation and the Boilers
M/s. Meecon Ltd. were under the possession of Official Liquidator. However, assessee has made various communications to Official Liquidator, sent legal notices and also filed petition in Hon’ble Delhi High Court seeking physical verification of the Boilers or alternatively confirm that the Boilers are in the possession of the leasee or the Official Liquidator. If the claim of the assessee was not genuine, the assessee would not have approached the Hon’ble High Court to direct the Official Liquidator to confirm the fact that Boilers are in his possession. This proves the bona fide of the claim made by the assessee. Thus, assessee has made sufficient efforts to substantiate its claim of depreciation. Merely because, assessee could not substantiate its claim due to liquidation of the lessee, it cannot be said that the assessee has furnished inaccurate particulars of income. It was further contested that even Assessing Officer was not sure of the addition made in the quantum proceedings and thus held that in case the lease is held to be genuine, the same should be treated as finance lease which further proves the bona fide of the assessee. It was further argued by the Ld. Counsel for the assessee that merely because claim of the assessee is not accepted in quantum proceedings, the penalty cannot be imposed. Disallowance of claim made by the assessee does not tantamount to furnishing of inaccurate particulars of income. In this regards, reliance was placed on the decision of Apex Court in the case of CIT vs. Reliance Petro-Products Ltd. (2010) 322 ITR 158 (SC). The Ld. Counsel for the assessee placed relied upon the following decision wherein the addition in quantum proceeding was confirmed by the Tribunal and it was held by the jurisdictional High Court that levy of penalty is not justified: a) CIT vs. Petals Engineers P. Ltd. (2014) 223 taxman 15 (Bom.)(HC) b) CIT vs. S. M. Construction (2015) 233 taxman 263 (Bom.)(HC)
M/s. Meecon Ltd. It was further contended that penalty proceedings are independent of assessment proceedings and merely because the appellant failed to establish its claim in quantum proceedings, it would not automatically become a case for levying penalty. In this regards, reliance was placed on the decision of UOI vs. Rajasthan Spinning & Weaving Mills (SC) 317 ITR 1.
The Ld. Counsel for the assessee also drew our attention to the fact that the appeal against the decision of the Special Bench of Tribunal in case of Indus Ind Bank (supra), which was our co-ordinate Bench while deciding the quantum proceeding in the present case, has been admitted by the High Court on a substantial question of law. Thus, the issue involved in the present case involves substantial question of law; and, wherever, interpretation of substantial question of law is involved, penalty cannot be levied.
The Ld. Counsel for the assessee also pointed out that there was no furnishing of inaccurate particulars of income inasmuch as none of the particulars of the transaction have been found to be incorrect or false and that it was only a difference of opinion with regard to allowance of depreciation which has formed the basis for the Assessing Officer to disallow the depreciation on Boilers. On this aspect, it has been argued that a difference of opinion on the issue of allowance of depreciation is a debatable issue, as discussed above, and would not justify levy of penalty u/s 271(1)(c) of the Act;
8. Without prejudice to the above submission, the Ld. Counsel for the assessee submitted that the penalty, if levied, may be reduced from 300% to 100%.
M/s. Meecon Ltd.
9. We have carefully considered the rival submissions. The facts leading up to the present proceedings have been sufficiently noted in the earlier paragraphs. Section 271(1)(c) of the Act prescribes for levy of penalty in a case where it is found that assessee has concealed the particulars of his income or that assessee has furnished inaccurate particulars of such income. Coming to the specific case on hand, penalty under section 271(1)(c) of the Act has been imposed for furnishing of inaccurate particulars of income in the context of disallowance of depreciation claimed by the assessee on Boilers leased to M/s SOL Ltd. The assessee had claimed depreciation on the Boilers in its return of income of `1,06,42,500/-. The Boilers were duly reflected in the financial statements of the assessee and depreciation on the same was also reflected in the Profit & Loss Account of the assessee. In the course of assessment proceedings, assessee was asked to substantiate its claim for depreciation on the Boilers. To establish its claim, assessee submitted the lease agreement, invoices for purchase of steam boilers from M/s. Chemcom Industries, details of payments made to M/s. Chemcom Industries, demand draft of deposit received from M/s. SOL Ltd., ledger copies of M/s. Chemcom Industries and M/s. SOL Ltd. reflecting lease hire charges received from M/s. SOL Ltd., various letters addressed to the Official Liquidator of SOL Ltd., Valuation report of Potdar Consultants furnished by Official Liquidator, Valuation report of Chopra & Chopra obtained by Official Liquidator, various letters addressed to the Official Liquidator of SOL Ltd., Civil Application No. 1273 of 2000 taken out by assessee in Company Petition No. 152 of 1998 praying for confirmation that the boilers are in possession of Official Liquidator. The Assessing Officer issued summons to enquire the genuineness of lease and purchase of equipment. Since the summons returned unserved, the Assessing Officer doubted the genuineness of the transaction
M/s. Meecon Ltd. and disallowed depreciation claimed by the assessee. He, further, initiated penalty proceedings u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income. However, it is conspicuous that the order of the Assessing Officer does not pin-point as to which particular(s) of income furnished by the assessee is found to be inaccurate. In fact, in the first round of litigation in quantum proceedings, when the matter reached the Tribunal, based on the additional evidence filed by the assessee, matter was remanded to the file of Assessing Officer. However, in the remand proceedings also Assessing Officer confirmed the disallowance, which has since been upheld by the Tribunal relying on the decision of Indus Ind Bank (supra). In this background, the Assessing Officer levied penalty u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income at the maximum permissible @ of 300% of tax sought to be evaded on depreciation claimed by the assessee.
The orders of the authorities below in the quantum assessment proceedings reveal that all information and documents to establish the genuineness of claim of depreciation on Boilers were furnished by the assessee. Moreover, the addition determined by the income-tax authorities is not on account of any inaccuracy, falsity or discrepancy found in the information and documents furnished by the assessee for its claim of depreciation. The addition is due to the lack of substantiation on the part of assessee and due to the fact that summons issued u/s 131 of the Act could not be served on the manufacturer and lessee. In fact, we find that while making addition even the Assessing Officer was not completely sure that the lease transaction was not genuine inasmuch as in the assessment order itself, he has taken an alternative plea that in case the same is held to be genuine, it should be treated as finance lease and the depreciation disallowance be upheld.
M/s. Meecon Ltd.
In fact, the inquiry and/or verification exercise carried out in the assessment proceedings cannot be said to have fructified to its logical end inasmuch as the lessee was found to have gone into liquidation. Therefore, it is not a case where the fact-position canvassed by the assessee was found to be false, but is a case where the position could not be substantiated due to the circumstances prevailing. Moreover, the bona fides of the assessee in making efforts to approach the Official Liquidator and even the High Court to obtain confirmation about the existence of the leased asset, report and affidavit of Chartered Accountant deputed by the assessee, etc. demonstrate that the assessee made a claim in good faith; that the claim was not ultimately upheld in assessment, cannot ipso facto be a ground to levy penalty under Section 271(1)(c) of the Act. At this stage, we may also say that the material on record may be enough to deny the claim of depreciation in the quantum proceedings, but so far as levy of penalty under Section 271(1)(c) of the Act is concerned, what is of paramount importance is to evaluate the bona fides of the claim made and not merely the merit of the claim. It is a well-settled proposition that the penalty proceedings and quantum assessment proceedings are independent proceedings and although the findings in the assessment proceedings are relevant, but the same are not conclusive so far as penalty proceedings are concerned. Considered in the aforesaid light, in our view, the levy of penalty in this case is quite untenable.
The Tribunal in quantum proceedings upheld the order of CIT(A) following the decision of Indus Ind Bank (supra), which decision is challenged before the High Court and the appeal of the assessee has been admitted by the jurisdictional high court on substantial question of law.
M/s. Meecon Ltd. 13. We now refer to the judgement of the Apex Court in the case of CIT vs. Reliance Petro-Products Ltd. (supra), relied upon by the assessee, wherein the Apex Court held that merely because assessee had claimed expenditure, which claim was not accepted or was not acceptable to revenue, that by itself would not attract penalty under section 271(1)(c) of the Act. The relevant extract of the said judgment is reproduced hereunder:
“10. It was tried to be suggested that section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing Officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.”
(Emphasis Supplied)
M/s. Meecon Ltd. In the present case also no fault has been found with the details furnished and documents furnished the assessee. The Assessing Officer in his order has not pointed out as to which particulars of the return, details furnished by the assessee are inaccurate. The disallowance of the claim of the assessee is based on the other factors and not on account of any fault of the assessee in furnishing return or details. Therefore, in our view, the fact-situation in the present case does not suggest that the claim of the assessee is lacking in good faith or due diligence, so as to render the assessee liable for penalty under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income.
In our considered opinion, the facts in the instant case also are good enough to apply the ratio of the judgment of the Hon'ble Supreme Court in the case of Reliance Petro-Products Ltd. (supra) referred above, wherein also the claim of the assessee was not accepted by the Assessing Officer and penalty was imposed by the Assessing Officer. We, thus, respectfully following the decision of Apex court, which is squarely applicable to the fact of the present case, delete the penalty imposed u/s 271(1)(c) of the Act.
Before parting, we may also make a reference to the decision of the Tribunal in the case of Ms. Laudres Austin vs. ITO, which has been relied upon by the Revenue. In this case the penalty under section 271(1)(c) of the Act has been upheld by the Tribunal in the background of a factual finding that the assessee deliberately and intentionally concealed her income. Such a factual position, as our above discussion shows, does not emerge in the present case. Therefore the said precedent does not help the case of the revenue herein.
M/s. Meecon Ltd. 16. As a consequence, we set-aside the order of CIT(A) and direct the Assessing Officer to delete the penalty imposed under section 271(1)(c) of the Act of `1,27,71,000/-, having regard to the aforesaid discussion.
Now coming to the additional ground raised by the assessee wherein assessee has challenged the validity of the notice u/s 271(1)(c) of the Act issued by the Assessing Officer. The Ld. counsel for the assessee pointed out that the notice issued u/s 274 r.w.s. 271 of the Act dated 16.10.2006, a copy of which has been placed on record at page 64-65 of the Paper Book, reveals non-application of mind by the Assessing Officer inasmuch as the irrelevant portion of the notice has not been struck off. It was, therefore, contended that the levy of penalty is illegal and deserves to be set-aside.
Since the assessee has succeeded on the merit, and we have deleted the penalty, the aforesaid Ground becomes academic and is not being adjudicated for the present.
In the result, appeal of the assessee is allowed, as above.
Order pronounced in the open court on 30th April, 2019.