2012 (3) TMI 335 - HC - Income Tax

Penalty u/s 271(1)(c) - Depreciation - Whether the assessee has been able to discharge onus under Explanation 1 to Section 271(1)(c) of the Act - the ownership of the property was not transferred to the partnership firm - Only right to use was given to the partnership firm - The said provision stipulates that the share of profit received by a partner from the partnership firm which is separately assessed is exempt subject to certain conditions - Assessees do take legal opinion and in the present case the return of income was duly audited. Claim for depreciation is a technical claim based on interpretation of legal provision - Delhi High Court in the case of Commissioner of Income-Tax Vs. Zoom Communication P. Ltd. 2010 (5) TMI 34 - DELHI HIGH COURT - Decided in favor of the assessee

Summary

Issues Involved:
1. Justification of the Income Tax Appellate Tribunal in confirming the penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Assessment of the appellant's claim for depreciation on a building used by a partnership firm.
3. Applicability and interpretation of Explanation 1 to Section 271(1)(c) of the Income Tax Act, 1961.
4. Examination of the appellant's bona fide belief and disclosure of all material facts.
5. Analysis of whether the claim made by the appellant was legally tenable or a false claim.

Detailed Analysis:

1. Justification of the Income Tax Appellate Tribunal in confirming the penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The core issue was whether the Income Tax Appellate Tribunal was justified in confirming a penalty of Rs. 16,34,673/- under Section 271(1)(c) of the Income Tax Act, 1961. The Tribunal had dismissed the appeal filed by the assessee and confirmed the penalty imposed by the Assessing Officer. The High Court framed the question of law to determine the correctness of this decision.

2. Assessment of the appellant's claim for depreciation on a building used by a partnership firm:
The appellant, a company, claimed depreciation on a building used by a partnership firm in which it was a partner. The total depreciation claimed was Rs. 41,62,650/-. The Assessing Officer disallowed this claim, and the disallowance was upheld by the High Court in a previous decision. The appellant argued that it was entitled to depreciation under Section 28(v) of the Act because the building was used for business purposes by the partnership firm.

3. Applicability and interpretation of Explanation 1 to Section 271(1)(c) of the Income Tax Act, 1961:
Explanation 1 to Section 271(1)(c) stipulates conditions under which penalty for concealment of income or furnishing inaccurate particulars should be imposed. The High Court noted that the imposition of penalty is not akin to criminal proceedings, and the question of mens rea or mala fides on the part of the assessee is not relevant. However, penalty should not be imposed if the assessee acted bona fide and disclosed all material facts.

4. Examination of the appellant's bona fide belief and disclosure of all material facts:
The appellant had disclosed all relevant facts in a note attached to the return of income, indicating that the depreciation claim was based on legal advice. The High Court examined whether the claim was bona fide and whether full and correct facts were disclosed. The Court found that the appellant had disclosed all material facts and that the claim was based on a plausible interpretation of the law, even though it was ultimately rejected.

5. Analysis of whether the claim made by the appellant was legally tenable or a false claim:
The High Court distinguished between a false claim and a debatable legal issue. The Court referred to the Supreme Court's judgment in CIT Vs. Reliance Petroproducts P. Ltd., which held that making an incorrect claim in law does not amount to furnishing inaccurate particulars if the claim is based on a bona fide belief. The Court found that the appellant's claim for depreciation was debatable and legally tenable, and not a false claim.

Conclusion:
The High Court concluded that the appellant had acted bona fide and disclosed all material facts. The claim for depreciation, although rejected, was based on a plausible legal interpretation. Therefore, the penalty under Section 271(1)(c) was not justified. The question of law was answered in favor of the appellant, and the appeal was disposed of with no order as to costs.