TMI Blog2005 (10) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... th of the profitability as well as the management of BSAL like Mr. C. S. Pani, former IAS officer as chairman, Mr. K. C. Kondaiah, the Member of Parliament and Mr. S. Madhava, the managing director, the assessee agreed to lease the equipment in the form of SGCI rolls. The value of such rolls was approximately Rs. 100 lakhs. BSAL was to place the order as per its requirement. Accordingly, BSAL procured the same from one M/s. B. M. Steel Pvt. Ltd. (BMSL), Chennai. On the strength of the following documents, the lease was granted. A copy of these documents was filed by the assessee during the assessment proceedings. (1) Certified copy of board resolution by BSAL dated July 25, 1996. (2) Lease deed dated September 25, 1996, which is signed by Mr. S. Madhava, managing director. (3) Pro forma Invoice No. 127/96-97, dated September 14, 1996, and final Invoice No. 318/96-97 dated September 24, 1996. (4) Certificate of installation signed by Mr. C. Sasikanth, director finance, on the letter-head of BSAL. (5) Receipt issued by M/s. B. M. Steel Pvt. Ltd. (6) Delivery challan issued by M/s. BMSL duly acknowledged by BSAL. (7) Copies of goods consignment note issued by Sri Balaji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased as well as obtained on lease. The Assessing Officer during the survey found that the total number of rolls leased and purchased should have been 3702, but only 361 rolls were found. It was also found that BSAL was not maintaining any stock register for SGCI rolls leased. Enquiries were also conducted with BMSL. It was noticed that the said BMSL had two directors, out of whom Mr. Mukundlal Bagree passed away. Smt. Asha Bagree, the wife of the late Mukundlal Bagree was examined by the DDIT (Inv.), Chennai. M/s. BMSL was unable to produce any books of account or records for production and sale of SGCI rolls. The bank account details of BMSL were called for. The Assessing Officer noticed that BMSL received large amount from various finance companies and BMSL diverted all the sums to BSAL, the lessee, on the same day or next day. The Assessing Officer therefore concluded that BMSL is a non-entity to produce the rolls. The funds were utilized by BSAL. The transporter M/s. Balaji Roadways, who is said to have transported the rolls, was also examined. The transporter said that they have not supplied any material other than transporting scraps to BSAL. The transporter also disowned the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of shares etc. Subsequently the lease rent were also being paid by them regularly. The advance cheques issued by them started bouncing after the seventh instalment, then only we realised that BSAL were in serious financial difficulties. It is apparent from the financial results of the company that there are huge outstanding dues from the assessee s debtors and the recovery from these debtors is very remote. In view of the facts that there being no reason to disbelieve the existence of plant and machinery on the basis of documents already furnished, it would be appropriate for us to reserve the right of crossexamination of the persons who have given the statements recently, as which basis the assessment is reopened. Without admitting the statements of the concerned persons and the non-existence of the assets on the basis of the materials available and in the alternative, to buy peace, we have considered the disallowance of 100 per cent. depreciation as earlier claimed with humble request not to levy penalty in view of the peculiar facts. For your kind information, the lease rent received by us have been offered to income-tax in the subsequent years. We would req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease. The fact that assets was not in existence was came to the knowledge of the assessee only when the assessee was informed by the Income-tax Department giving various copies of letters and statements given by BSAL managing directors and suppliers, etc. The cheques issued for some of the lease rent were also honoured by BSAL. It was made known to your goodself by the assessee s letter dated March 8, 2002, that they were accepting the disallowance of depreciation with clear understanding that no penalty will levied and further in order to buy peace from the Department, the assessee-company accepted for the disallowances of depreciation. A further reply was filed by letter dated September 16, 2002, extracted herein : Kindly refer to your abovecited notice requiring us to produce documents relating to the claim of 100 per cent. depreciation on certain assets leased to M/s. Bellary Steels and Alloys Ltd. In this connection, we write to submit that all relevant documents like order copy, invoice for supply for rollers, lorry receipt duly acknowledged by Bellary Steel and Alloys Ltd. (BSAL), invoice for transportation of rollers, installation certificate for installation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment reopened the assessment. Looking into various correspondence shown to us by the Department which brought out the fact that the lease transaction entered by M/s. Bellary Steels was not genuine. Therefore, in order to buy peace from the Department, we accepted the disallowance of depreciation. Further, the company is also taking criminal action against M/s. Bellary Steels for making wrong claim as well as for creating ficitious documents relating the supply of steel rollers and also putting the company into unnecessary complications with the Income-tax Department. A further reply was also filed on September 21, 2002, during the course of penalty proceedings as extracted herein : As mentioned by us on several occasions, the lease transaction with M/s. Bellary Steels and Alloys Ltd. (BSAL) was introduced by M/s. Kotak Mahindra, one of the leading finance consultants in India. They informed us that this lease transaction is a bona fide one and the same is required for expansion project of BSAL. The said consultant also informed that the steel rolls were already ordered by BSAL and it is ready for delivery. They also gave us to understand that the finance to be given by us is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (a) The reasons cited of the lessee company having a former IAS officer as its chairman, being a manufacturing concern and the lessee company being introduced by some other finance company is not relevant to the issue on hand. The assessee has only pointed fingers at the reputations (or otherwise) of others to defend its own innocence but has failed to submit any evidence to suggest that any other person has vouched for the genuineness of lease transaction intended to be entered into by it. (b) The receipt of lease rentals and the subsequent admittance of the same as revenue in the return filed does not permit the assessee to claim depreciation on assets not existing. The fact that the transaction amounted to a finance transaction is not doubted but what is objected to is the claim of 100 per cent. depreciation on bogus assets. (c) The lessee company has defaulted on the payment of installments and the cheques issued by it have also bounced. The assesseecompany is expected to make efforts for the receipt and realization of its installments due. The assessee has not filed any criminal complaint against the lessee as claimed by it even after the lapse of four years of default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion had never existed. (i) A chronology of events further seals any iota of doubt whether the assessee had been a willing accomplice in the fraudulent transaction entered. The above were the documents submitted by the assessee-company, prior to February 7, 2002, in support of its claim that the lease transaction entered by it was a bona fide and genuine one. The entire transaction of agreement of lease, payment to manufacturer and the dispatches of 32 nos. of SGCI rolls is said to have happened on only one day. The rolls are said to have reached Beillary on the third day and were also reportedly installed and put to use. The undue haste in paperwork disregarding the impossibility of happening of events is in itself a proof of the direct complicity of the assessee to the fraudulent nature of transaction entered. It would be offensively naive and crossly incorrect to presume that the assessee was not aware of what is going on or that the assessee was not a willing party to the sham paper transactions entered. (x) From the above, it is clear that the facts and circumstances lead us to a undeniable conclusion that the assessee was a voluntary participant in the bogus transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are left behind while creating paper evidence to give legality to a sham transaction. The supplier before receiving the payment, dispatched the rolls on September 25, 1996, to BSAL. Thus, the supplier acted as willing accomplice to the sham transaction. BMS diverted the entire fund to BSAL. Thus not only the assessee but BMS and BSAL were also hand in glove in respect of such sham transaction of purchase and leasing the same, just to claim 100 per cent. depreciation. The explanation of the assessee that it was being misled to believe that the transaction is genuine, is pathetic and clearly an afterthought Various terms of lease deeds are not complied like identification of the lease asset, verification of the said asset, insurance, verification of certification of installation, undue haste in executing the transaction. Though nine installments were paid, even when last three installments were not paid and the cheques bounced back, the appellant has not taken any action for the default. After the end of lease period, the assets are not recovered but are allowed to be held in possession of the lessee. All these defects are for the obvious reason that the assessee merely wanted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the hon ble Supreme Court in the case of K. P. Madhusudhanan v. CIT [2001] 251 ITR 99 may support the Revenue s, case, it is distinguishable in respect of the appellant s case since the appellant had discharged the onus of proving the claim for depreciation by adducing all the evidences, and only thereafter the appellant had offered the same for taxation, to buy peace since, the MD of the lessee had given a statement to suggest that the transaction was bogus. Even though the appellant could have proved that the statement of the MD was on incorrect statement the appellant had desired to avoid protracted litigation, on account of which the income was offered for taxation. It was also submitted that when the depreciation was claimed, the appellant was able to prove that the claim was valid as the appellant had all the evidences for purchase and also there was a valid lease agreement and the receipt of goods had also been acknowledged by the lessee who had also honoured the lease by paying the lease rents up to the ninth instalment covering substantial portion of the lease amount and it was only in 2000 for the reason best known to the lessee it had tried to claim that the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transport of goods, the assessing authority has tried to submit that there was no transport of goods and the transporter s statement would vouch for it. However, on a perusal of the statement it is found that nowhere the person who had been examined could show that there could be no transport of goods. All that he said was that his vehicle did not transport the goods. But then, he has also categorically said that the vehicle number found in the transport voucher was belonging to his relatives and with regard to the movement of lorry as on the particular date he could give the details by Friday. Reference can be made to question No. 10 of the transporter s statement found in the departmental paper book at page 2. Subsequently, no attempt was made by the Revenue to find out as to whether the said lorry was shown in the voucher had plied during the relevant time. Also, the Department was not able to prove as to the tonnage carried by the lorry was possible. In fact, the lessee had acknowledged the receipt of the goods. It is also not conclusively proved that the goods remained with the lessee or not. In fact, there was sport examination by the Revenue authorities and there wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, the penalty levied under section 271(1)(c) of the Act is liable to be cancelled. Learned Departmental Representative Shri Ajit Korde on the other hand strongly supported the penalty order as well as the appellate order impugned before us. Detailed argument was made by Shri Korde. The learned Departmental Representative also filed a paper book containing 36 pages. Shri Korde submitted the following propositions for the consideration of the hon ble Bench : (a) The facts show that the assessee knew all along that the lease finance given to the BSAL was bogus transaction and not operational lease. The assessee-company had purchased SGCL rolls from B. M. Steels P. Ltd., Chennai, who was not manufacturing company. It is unbelievable that, the company purchasing goods worth Rs. 1 crore could not verify the capacity of the vendor to manufacture and supply. As recorded by the Commissioner of Income-tax (Appeals) in the third paragraph on page 27 of the appellate order : . . . had it done so, the appellant-company would have certainly found out as was revealed in the course of the survey and post survey enquiries, that the said supplier company was never a manufacturing company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is clearly the commission of B. M. Steels P. Ltd. The receipt and withdrawal pattern show that B. M. Steels P. Ltd., was not real manufacture of SGCI rolls but a commission agent giving entries. When confronted with this evidence, the assessee did not reply to this query but offered depreciation amount was for the taxation. (d) The assessee cannot take the argument as to the transactions between B. M. Steels P. Ltd., and BSAL is not his concern as an analysis of bank statement proves that the assessee s supplier B. M. Steels neither a manufacturer nor was a genuine supplier of SGCI rolls worth Rs. 1 crore. Further, the assessee itself accepted the transaction to be bogus and accepted depreciation disallowance. Secondly, the assessee-company already received lease rental of 9 installments totalling Rs. 96,72,588 for non-existing asset. Therefore the argument of the Department not proving money coming back to the assessee is not relevant. (e) The assessee entered into lease agreement with the BSAL on September 25, 1996, (agreement on page 1 of the assessee s paper book) paragraph 2 on page 3 of the agreement and the assessee s letter to B. M. Steels P. Ltd., Chennai, dated S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtered accountant who certified that the company has adequate internal audit system. The auditors have certified that the company has maintained proper records showing full particulars of quantitative details and location of fixed assets. It has further certified that physical verification of all assets is reported to have been carried out by the management during the year. This clearly shows that the assessee wrongly certified to the auditors that physical verification of all the assets was carried out when the assets never existed. (h) The speed with which lease transaction was entered into and was executed goes on to show that the assessee-company not only was aware of the bogus transaction but was also part of it. The lease agreement was entered on September 25, 1996. However, on September 26, 1996, the payment for rolls were made by the assessee-company to the supplier company, B. M. Steels P. Ltd., Chennai (refer pages Nos. 30, 31 of the assessee s paper book). 32 numbers of SGCI rolls were dispatched on September 25, 1996, itself which were delivered, installed and put to use on September 27, 1996, as certified by the lessee-company, BSAL. The assessee-company chose to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Madhava, managing director of BSAL that all lease transactions were not operational lease transactions and were bogus lease transactions. In this connection, reliance is placed on the decision of the Mid East Portfolio Management Ltd. v. Deputy CIT [2004] 271 ITR (A. T.) 87 (Mum) [SB] for the discussion on operation lease and financial lease. Vide paragraph 4 of the Assessing Officer s letter dated February 7, 2002, (page 10 of the assessment order). His statement was made available to the assesseecompany. Even after confronting with the statement of Mr. S. Madhava, the assessee-company had maintained the transaction was genuine. The Assessing Officer also had confronted to the assessee that the assesseecompany was regularly going through the annual accounts of the lessee company. Perusal of these accounts clearly shows that there was no quantum jump in amount of raw material consumed or production made between the assessment years 1994-95, 1995-96 and 1997-98. This question was raised by the Assessing Officer in paragraph 2(a) of its letter dated February 13, 2002, which is reproduced at the page 12 of the assessment order. It is not believable that the assessee-company did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not aware of non-existence of asset. Even than consider this fact : perusal of article 2 of the lease deed show that the lease period was from September 25, 1996, to September 24, 1999. According to article 22 of the agreement on termination of the agreement, the lessee was to deliver the asset at the place specified by the lessor. It is seen that the assesseecompany has not renewed its lease of SGCI rolls to BSAL nor it has leased it out to any other company. This means that, the assessee-company should have taken the control of the assets belonging to it on September 25, 1999. Therefore, the assessee-company knew about its non-existence of assets on September 25, 1996, itself. However, the assessee did not choose to withdraw its depreciation claim even during the original assessment proceedings. It may be noted that the original scrutiny assessment was concluded on March 13, 2000, much later than September 25, 1999. It may be mentioned that, the assessee knew the reason of issuing notice under section 148 after survey on BSAL, however maintained that, its depreciation claim was genuine. (p) Why the assessee did not take possession of the leased asset after default of rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing its owner. (q) According to article 13 of the lease agreement (page 10 of the assessee s paper book), the BSAL was to insure the leased asset at its own cost and deliver the assessee-company insurance policy and premium receipts. No such record of insurance of asset is furnished by the assessee. It is commercially imprudent for any owner to sit quietly when its asset worth one crore is not insured. However, the assessee did not raise any objection on non-insurance of the asset as it knew that non-existent assets cannot be insured. (r) Further, in the statement of Sri. M. A. Uppal, managing director of the assessee-company (reproduced by the Assessing Officer on page 27 of the penalty order), he pleaded ignorance of this particular transaction. According to him, this transaction was handled by the board of directors headed by Mr. T. P. G. Nambiar. This shows that this was not regular normal lease transaction. Had it been a regular and normal lease transaction, the managing director of the assessee-company would know about it. (s) The assessee in its grounds of appeal No. 4 has urged that the appellant could establish the genuineness of the transaction with documentary pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Therefore, even when the appellant-company was asked about the transaction, with the bona fide belief, the appellant informed the learned Assessing Officer that the transaction is real, duly supported by all connected documents. The bogus invoice, lorry receipts, etc., came to the knowledge of the appellant only when the statement recorded from the transport contractor and B. M. Steels P. Ltd., was produced before the appellant-company with the notice under section 142(1) dated February 13, 2002. Only at that time the appellant-company realised that the transaction was not genuine. In page 23 of the penalty order in ninth line from the bottom of the page, the assessee in its letter dated September 16, 2002, mentioned as under : In the present transaction, the fact that asset were not existing could not be gathered earlier because as in any other lease transaction the connected documents were produced by M/s. Bellary Steels and Alloys Ltd., and the lessee being a manufacturing concern, who was regularly using steel rolls for their manufacturing process, left us to think that this transaction of purchase of steel rolls were genuine and it was for bona fide use at their fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is drawn to the judgment of the jurisdictional High Court in the similar case of bogus, sale and lease back transactions. The hon ble High Court in the case of Avasarala Automation Ltd. v. Joint CIT [2004] 266 ITR 178 (Karn) on page 190 has held as under : As noticed by us earlier, the taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the assessee has chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and determine the true character of the relationship. However, the only restriction is that the legal effect of the transaction should not be displaced by probing into the substance of the transaction . Therefore, while every person is entitled to so arrange his affairs as to avoid tax ation, the arrangement must be real and genuine and not a sham or make believe one. Further, on page 191(C) in the same case, the hon ble High Court has held as under : Therefore, the Tribunal and subordinate authorities were fully justified, taking into account several circumstances referred to by them in the orders impugned, to determine the nature of the new and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sham and colourable transaction. In fact, the assessee knew very well that asset did not exist. This is evident as it immediately paid purchase amount to non-capable non-manufacturer supplier, whose bank account show that supplier was merely commission agent. Further, it did not insure the asset. And most importantly, it did not withdraw its depreciation claim before the conclusion of the original assessment proceedings on March 13, 2000, whereas, the lease agreement expired on September 24, 1999, and at that time the assessee could have known the non-existence of the asset. Again, the assessee has not proved the physical existence of the asset. (w) The above discussion show that the assessee knowingly entered into non-genuine lease transactions with the BSAL. Considering the ratios laid down by the jurisdictional High Court in the case of Avasarala Automation Ltd. v. Joint CIT [2004] 266 ITR 178 (Karn) and the Special Bench in the case of Mid East Portfolio Management Ltd. v. Deputy CIT [2004] 271 ITR (A. T.) 87 (Mum) and by the Bangalore Income-tax Appellate Tribunal in the case of Maharashtra Apex, on bogus depreciation claim, this is a fit case for levying concealment penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [2001] 251 ITR 99. (iv) It is true that the Assessing Officer s satisfaction in the assessment order is considered as a pre-condition for the initiation and levy of penalty as held in CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC), D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC) and in CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi). The judgments of the Supreme Court have to be read in the context when the word deliberately was in the section 28(1)(c) of the 1922 Act. At that time, the burden was on the Assessing Officer to prove concealment. After insertion of Explanation 1, the burden is now shifted to the assessee and there is a concept of deemed concealment. Thus, the requirement of the Assessing Officer s satisfaction at the time of assessment for initiating penalty proceedings is watered down considerably. (v) A careful reading of these judgments show that the courts have not laid down general proposition that initiation of the penalty proceedings at the end of the assessment order is not indicative of the Assessing Officer s satisfaction. On the contrary, the Supreme Court has held that direction to initiate penalty proceedings at end of the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Mills was the proprietary concern of the assessee and the income from that concern should be considered to be the income of the assessee. Notice was ordered to be issued for proposed penalty under section 271(1)(c) of the Act to the assessee in regard to the concealment of and furnishing inaccurate particulars of income from Kohinoor Mills. Notices, it would appear, were thereafter issued by the Income-tax Officer to the assessee . (vii) Further, in the above case, the Supreme Court has held that the nature of satisfaction to be reached is a prima facie satisfaction and not a final and complete satisfaction. On page 563, the Supreme Court has held as under : It may also be observed that what is contemplated by sections 271 and 274 of the Act is that there should be, prima facie, satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner in respect of the matters mentioned in sub-section (1) before he hears the assessee or gives him an opportunity of being heard. The final conclusion on the point as to whether the requirements of clauses (a), (b) and (c) of section 271(1) have been satisfied would be reached only after the assessee has been heard or has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , justifying the levy of penalty. In that case, the Assessing Officer had at the foot of the assessment order indicated that the action under section 28 had been taken for concealment of income. However, the levy of penalty was not immediately thereafter, but a little later. The High Court, being of the view that the actual initiation of penalty proceedings being not in the course of the assessment proceedings and as such was not permitted in law, it set aside the levy of penalty. The apex court, while reversing this order of the High Court, held that the High Court was in error in assuming that a penalty under section 28(1)(c) of the Act could not be imposed unless it was forming part of the assessment proceedings and in continuation of the same. The apex court, pointed out that the requirement of law was only that satisfaction should have been reached in the course of the assessment proceedings and actual levy of penalty could be initiated later also and it was one such case. It also clarified that an order of penalty could be passed in respect of the firm even after the dissolution of the firm. In this context, Sri G. Sarangan, learned senior counsel also brought to our notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271(1) and 273(1) is similar. The hon ble Allahabad High Court observed thus (page 626) : With profound respect to the Delhi High Court decision, we are unable to agree. It may be noted that whenever the Assessing Officer has to record his satisfaction under the Income-tax Act, it is specifically mentioned, e.g., in section 148(2) of the Act which states that the Assessing Officer before issuing any notice under the section will record the reason for doing so . Section 273 does not have a similar provision requiring recording the reason or satisfaction. Hence, it has to be inferred that Parliament never intended that before initiating penalty proceedings and issuing notice under section 273, the Assessing Officer must record his reasons in writing for doing so. Had that been so there would have been a specific mention about it in section 273 of the Act. We are, therefore, of the opinion that although the Assessing Officer must have satisfaction as required under section 273 of the Act, it is not necessary for him to record that satisfaction in writing before initiating penalty proceedings under section 273 of the Act. We are fortified in the view, we are taking by the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT [2000] 243 ITR 776 has held that even in case where the assessed figure is a loss or the losses is converted into income, the penalty will be leviable in respect of tax payable on additions/disallowances made. Similar view has been adopted by the hon ble Bombay High Court in the case of CIT v. Chemiequip Ltd. [2004] 265 ITR 265. The decision of the hon ble Supreme Court in the case of CIT v. Prithipal Singh and Co. [2001] 249 ITR 670 is not a speaking order and does not declare law to be followed by the subordinate courts under article 141 of the Constitution. It merely affirms the decision of the hon ble Punjab and Haryana High Court in CIT v. Prithipal Singh and Co. [1990] 183 ITR 69 and limited to the facts of that case. Since the decision of the hon ble Supreme Court in Prithipal Singh and Co. [2001] 249 ITR 670 was rendered at the time when Explanation 4 was not in existence during the assessment year 1970-71, the said decision cannot be applied in the present situation. (xv) The decision relied by learned counsel for the assessee will not apply to the present set of facts. All these decisions are rendered in view of particular facts of the case. In the present set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very much available. Even the director of the appellant had confirmed before the assessing authority. The allegation that the appellant had not physically verified the materials is again not correct. The appellant had the information about the receipt of materials by BSAL who had also honoured the lease agreement by paying instalment regularly for more than 2 years. It was only after 9th instalment they did not comply with the terms. In the circumstances, there could be no doubt in the minds of the appellant for the receipt of materials by BSAL which belonged to the appellant. Thus the depreciation claim was rightfully made at the appropriate time since the appellant had leased the materials in the course of its leasing business and thus the appellant was entitled to the depreciation as claimed, as held by the hon ble Supreme Court in the case of CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308. The fact that the appellant did not claim back the material later also would not prove that the appellant did not act bona fide when the transaction took place. The rolls after substantial use would become scrap. Hence the reclaiming of the rolls later was not of any use to the appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the Revenue s investigation created some doubts, the appellant wanted to avoid the protracted litigation and that is how the claim was withdrawn, which is fully explained in various submissions made by the appellant copies of which have already furnished in the paper book of the appellant. Thus the penalty is not exigible. Shri Parthasarathy refuted to all the submission by the learned Departmental Representative for the proposition that satisfaction has to be arrived at during the course of assessment proceedings that the assessee has either concealed the particulars of his income or has furnished inaccurate particulars of income. Though various case law are relied on in this regard, they all can be distinguished with the facts. The decision by the hon ble Delhi High Court in the case of Ram Commercial [2000] 246 ITR 568 was rendered after considering the decision of the hon ble Supreme Court in S. V. Angidi Chettiar [1962] 44 ITR 739 and D. M. Manasvi [1972] 86 ITR 557 (SC). What has been held by the hon ble Supreme Court as well as the hon ble High Court is that there should be satisfaction before initiation of penalty. If from the assessment order it can be gathered tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is submitted that what the appellant tried to explain was that the Revenue having drawn the conclusion on the basis of enquiry made by it and also on account of the lessee s statement that the transaction was bogus, the appellant desired to withdraw the claim of depreciation even when it had materials to prove the bona fides of its claim and it was done only to avoid protracted litigation and to buy peace. It did not concede that the transaction was bogus. This is evident from the fact that the appellant had offered the rental income for taxation in its entirety. In any case when the depreciation was claimed in the relevant assessment year the appellant had no iota of doubt with regard to the genuineness of the transaction. Thus the claim could never be said to be a mala fide claim to justify the levy of penalty. As regards the quantum of penalty, Shri Parthasarathy submitted that penalty is leviable only in regard to tax payable by the assessee. Penalty is imposed in addition to the tax payable and hence what is to be computed first is the tax and then the penalty for non-payment of such tax. Thus, when the income declared by the assessee was loss and the same is reduced and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received lease rentals up to and including ninth instalment payable on September 25, 1998. The said lease rentals were offered as income of the appellant. The same are assessed as offered. For the first time, the cheque issued for lease rentals due on December 25, 1998, was dishonoured when the same was presented on April 15, 1999. The assessee initiated criminal proceedings for dishonour of the said cheque. The reassessment was completed on March 15, 2002, wherein the claim of depreciation on SGCI rolls leased to BSAL was disallowed as withdrawn by the assessee. The present appeal is against levy of penalty on the ground that the depreciation was claimed on bogus lease transaction which amounts to concealment of particulars of income attracting penalty under section 271(1)(c). The main plank of the Assessing Officer s argument to hold that the assessee has furnished inaccurate particulars is that : (i) the assessee is a voluntary participant in bogus lease transaction to claim 100 per cent. depreciation on non-existent assets ; (ii) the assessee demonstrated undue haste in entering into lease transaction without verifying the capacity of manufacturer, the capacity of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the specification for the same. What type of equipment is required is determined by the lessee. Similarly the manufacturer who can produce such made to order equipment is also selected by the lessee. Thus, the lessor is neither to verify what type of equipment is required nor to verify the capacity of the manufacturer. When the lessee himself has produced the pro forma invoice, transporter receipts, installation certificate and accepted all the terms of lease, there is no reason with the lessor to doubt the genuineness of transaction. The lessor is to ensure that his money is safe. For this purpose, the lessor insisted for post dated cheques, obtained collateral security by way of shares valuing more than lease transaction, and obtained other documents like lease deed, guarantee from managing director, etc. In the absence of any reason to doubt the transaction and in view of the categorical statement by the lessee, particularly when nine quarterly installments of lease rentals were received on due dates, the assessee never gets a whisper about anything wrong in such lease transaction. Even if the assessee was to claim 100 per cent. depreciation on such assets leased, the tax the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00, filed by Shri S. Madhava to the Assessing Officer during the survey proceedings is worth noting, which is extracted herein : Therefore, I submit that all the lease finance agreements entered into by the company are genuine financial leases only and not operational leases. We will not be in a position except in a few cases to strictly to prove the existence of the supplier or his capacity to manufacture or otherwise produce the equipment, which are supplied to us as per the invoices. We will also not be in a position except in few cases to prove the arrival of the equipment into our factory or their existence now, more so on account of the fact they being 100 per cent. depreciable items, some of them might have got damaged upon even on trial use and they had to be scrapped. The original invoices, lorry receipts, etc. are furnished to the banks and NBFCs for their documentation work and except in the case of a few, we may not be having them now. If we report the destruction or scrapping to the financial institutions, they will pounce on us to repay the funds borrowed which had gone into the project and therefore, we had not reported the loss of the asset to them also. Anyway, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led the original return of income but also when it filed the return pursuant to notice under section 148. Explanation 1 to section 271(1)(c) provides that if a person fails to offer an explanation or if the explanation offered is found to be false, penalty is leviable. In the present case, the assessee has neither failed to offer an explanation nor the explanation is found to be false. Explanation 1 also provides that if a person, who offers an explanation, is unable to substantiate or fails to prove that such explanation is bona fide, penalty is leviable. In the present case, it is seen that not only the appellant has offered an explanation, which he has been able to substantiate, and it is also proved that the explanation offered is bona fide. Thus, it cannot be said that the assessee has either concealed the particulars of its income or has furnished inaccurate particulars. Various case laws are cited by Shri Korde in support of his arguments. We have perused all the case law in this regard. Whether penalty is leviable or not is based upon the facts and circumstances of each case. Neither of the decisions related is on identical facts. Strong reliance was placed on the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a question of fact. The hon ble Bombay High Court in the case of CIT v. Zuari Finance Ltd. [2004] 271 ITR 538 and the hon ble Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT [2004] 268 ITR 130 held that if the transaction is genuine, the lessor is entitled to depreciation. Even though the transaction is that of financial lease, it has no implication on allowance of depreciation as opined by the Central Board of Direct Taxes in its Circular No. 2 of 2001 dated February 9, 2001 (see [2001] 247 ITR (St.) 53)). Learned counsel for the assessee has placed heavy reliance on the decision of the hon ble Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 which has been followed by the hon ble Delhi High Court in the case of Diwan Enterprises [2000] 246 ITR 571. Reliance is also placed on the decision of the Income-tax Appellate Tribunal, Bangalore in the case of Jeevan Saldana (supra). This has been counted by the learned Departmental Representative by arguing that the hon ble Delhi High Court while deciding the issue in Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 has not considered its own decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee could not be held to be guilty of concealment in regard to a sum of Rs. 15,50,000 offered in the revised return. This was noted in the office note given below the assessment order. The Tribunal therefore held that when there is a contrary note rather than satisfaction about concealment, penalty under section 271(1)(c) is not attracted even though such additional income is offered by the assessee and assessed as such. Thus, the foundation of the decision of the hon ble Delhi High Court is founded on the fact as noticed by the Tribunal and not laying down any general proposition that issue penalty notice under section 271(1)(c) does not amount to satisfaction. On the contrary, as held by the hon ble Delhi High Court itself in the case of Rajinder Kumar Somani [1980] 125 ITR 756 a notice is issued under section 28 of the 1922 Act is held to be sufficient compliance with the statutory requirement of recording satisfaction. This is further fortified by the decision of the hon ble Supreme Court in the case of CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 and that of D. M. Manasvi v. CIT [1972] 86 ITR 557. We accordingly hold that when the Assessing Officer has discussed the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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