TMI Blog2010 (4) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... PRAMOD KUMAR. ORDER-PRAMOD KUMAR, A.M.: The question that we need to adjudicate in this appeal is whether or not the learned CIT(A) was correct in upholding the penalty of Rs. 53,69,892 imposed on the assessee, under s. 271(1)(c) of the IT Act, 1961 ('the Act' in short) for the asst. yr. 1996-97. 2. The impugned penalty was imposed in respect of three additions to the income returned by the assessee but, as at this stage, only surviving addition is for disallowance of depreciation of Rs. 1,00,20,400. We will, therefore, keep our discussions confined to this disallowance of depreciation. 3. The relevant material facts, as culled out from the material on record, are as follows. The assessee is engaged in the business of manufacturing detergent powder, blue pigments and other such chemicals. In the relevant previous year, the assessee claimed a depreciation of Rs. 1,00,20,400, being one hundred per cent of one 'fully automatic heated tunnel furnace' leased out to one Duckfin International Ltd. in Madhya Pradesh (Duckfin, in short) for aggregate lease value of Rs. 1,26,25,680. This furnace was claimed to have been purchased from one Associated Engineers. Madhya Pradesh (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so noted that on the very day of entering into lease with Duckfin, the assessee also entered into a tripartite agreement with VCIL securing the payments of lease instalments by Duckfin. The AO found this conduct curious. On one hand, assessee was leasing out asset to a lease customer, and on the same day, its own sister concern is discounting the repayment liabilities of the said lessee, thus nullifying the lease transaction. Even this nullification was at a huge cost to the assessee group, and the exercise of nullification also raised doubts on bona fides of the arrangement. On these facts, the AO was of the view that "this sort of change of mind and irrational behaviour on the part of the assessee company can lead to one conclusion i.e., the assessee was only keen to avail depreciation on a non-existing asset" and that "therefore, it has entered into a lease transaction and claimed depreciation, and since it knew that there is no asset involved in the lease transaction, it has entered into a tripartite agreement just to secure its own money...". The AO considered the submissions of the assessee, and finally concluded that "the lease transaction is only a bogus transaction as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, in a way the Authorised Representative has admitted that the so-called lease transaction was not genuine. Secondly when the lease transaction was sham and bogus, how can it be said that the impugned amount was a return of the money so financed ? Especially, when the entire transactions had not been established by the appellant as even genuine transactions of any kind between the said Duckfin and itself, how can it claim that Duckfin had returned in instalment the original amount? 28. It must be remembered that during the investigation of the leasing transaction the appellant had very innocently claimed that it had no direct knowledge of the Duckfin and the so-called asset supplier. Only an intermediary had allegedly done the transaction. Now, the appellant had never bothered to find out the said party to prove the genuineness of its claim, yet had very conveniently received lease rentals year after year as allegedly agreed upon. It is surprising and rather highly incredible that the appellant had still not been concerned to know wherefrom and from which bank account the said so-called lease rental had come to it and who in fact had been the signatory in the cheques for the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 9th Feb., 1999 from the assessee, addressed to the AO, which, inter alia, urged the AO to summon the broker through whom the lease was arranged. It was also pointed out that the assessee had duly obtained signature verification of Duckfin from the SBI and as such assessee was of the genuine belief that Duckfin was a genuine business concern. Learned counsel also invited our attention to the lease agreement which was filed before the AO. On the strength of these submissions, it is contended that the assessee had done everything at his command to establish bona fides of the lease transactions, and, therefore, irrespective of whatever view has been accepted in the quantum proceedings, it cannot be said that the assessee has failed to give a reasonable explanation with regard to the claim of depreciation. Our attention is also invited to Expln. 1 to s. 271(1)(c) in support of the proposition that unless the assessee does not give a reasonable explanation, or unless the explanation so given is proved to be false, penalty under s. 271(1)(c) cannot be imposed. Learned counsel relies upon decision of a Co-ordinate Bench in the case of Kanbay Software India (P) Ltd. vs. Dy. CIT (2009) 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again submits that, in any event, there is no concealment at all; its only a timing issue in the sense that the year of taxability is shifted rather than a new income being brought to tax. He submits that in all the IT returns filed by the assessee, gross lease rentals were shown as income whereas now only interest component of lease rental is being brought to tax. The net result is that while income is being increased in the year 1 due to disallowance of depreciation, income is being decreased in years 1 to 5 due to 'principal amount' component in lease rental being taken out of the ambit of taxable income. Our attention is invited to detailed computations, substantiating this claim, at p. 96 of the paper book. It is then submitted that in view of Hon'ble Bombay High Court's judgment in the case of CIT vs. Hind Rajasthan Construction Co. (1979) 116 ITR 304 (Bom) merely because income of one year is shifted to another year, penalty under s. 271(1)(c) cannot be imposed. Learned counsel also invited our attention to the returned incomes of the assessee for the asst. yr. 1997-98 onwards which were Rs. 1.68 crores, Rs. 2.69 crores, Rs. 4.24 crores, Rs. 4.72 crores and Rs. 3.35 crores r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of issuing bogus bills, and, as a matter of fact, the case of the Revenue has been that they are not able to trace the said concern. Learned counsel once again reiterated his submissions and urged us to delete the impugned penalty. 10. We have given our careful consideration to the rival submissions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 11. It is necessary to understand the nature of transaction that the assessee has entered into, before we address ourselves to the question whether it is a fit case for imposition of penalty or not. The assessee is a manufacturer of certain detergent, pigments and other chemicals. It has nothing to do with any leasing or financing business in the normal course of business. In this year, the assessee entered into a lease transaction with, what the assessee terms as, 'an unrelated party'. Under the lease arrangement, the assessee was to buy certain equipment for Rs. 1.02 crores and give it on lease to Duckfin for lease rentals aggregating to Rs. 1.26 crores. Assuming that it was a commercial arrangement, the gain that the assessee would have had in such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - pays Rs. 1.02 crores to on 25-11-1995, pays Rs. 1.02 crores to ^ | | all due lease instalments paid | | by Vardharaja Credit (a group | | company) to the assessee | | v Varadharaja Credit Investments Duckfin International Ltd. Receives Rs. 86.67 lakhs on 25-11-1995 86.67 lakhs to Melvern Trading (P) Ltd., as per assessee itself admittedly under instructions from and to the credit of Vardharaja Credit Investments 12. With the benefit of the above analysis, we are of the considered view that there is no merit in assessee's contention that the lease transaction was a bona fide transaction, and, therefore, even though the assessee may not have pursued the claim in appeal, the assessee had a strong case on merits. We have noted that the AO has done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxable income of the assessment year before us. Even this concept of 'tax neutrality over a period of time' is fallacious in as much as what is to be really seen is whether income of a year has been taxed in that particular year or not, and merely because a wrong deduction in one year is offset by a corresponding income in a later year, it cannot be said that such a deduction did not result in concealment of income qua that assessment year. 14. We may now take up assessee's reliance on signature verifications, the copies of invoice of furnace, delivery challan of furnace and chartered accountant's certificate certifying installation and commissioning of furnace. As regards learned counsel's references to signature verifications by bankers, these signature verifications, by no stretch of logic, can be seen as reasonable evidence of genuineness of a business concern, but such signature verifications at best show that the said business concern, whatever be its worth, has a bank account and certifies the signatures of the signatory. Just because a person has a bank account is hardly sufficient to establish his bona fides. We have noted that the invoice for an amount of Rs. 1.02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be an acceptable explanation. He may not prove what he asserts to the hilt positively, but at least material brought on record must show that what he says is reasonably valid." 16. The above views were approved by the Hon'ble Supreme Court in the case of CIT vs. Mussadilal Ram Bharose (1987) 60 CTR (SC) 34 : (1987) 165 ITR 14 (SC). Referring to the judgment of Hon'ble Patna High Court, their Lordships have observed as follows: "The Patna High Court emphasized that as to the nature of explanation to be rendered by the assessee, it was plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is given, the burden placed on him will be discharged and presumption rebutted. We agree. We further agree that it is not the law that each and every explanation by the assessee must be accepted. It must be acceptable explanation, acceptable to a fact-finding body." 17. Viewed in this perspective, just because assessee has an explanation-whatever be its worth and credibility, it does not cease to be a case in which concealment penalty is to be levied. In our considered view, and bearing into mind entirety of the case, the explanation of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts which were claimed to have been leased out did not exist and the entire lease arrangement was found to be a sham arrangement. A disallowance of depreciation for non-existent assets cannot be treated at par, even for the purposes of imposition of penalty and for deciding whether or not correct particulars have been furnished, with a disallowance under s. 14A as was dealt with by the Hon'ble Supreme Court in the case of Reliance Petroproducts. Learned counsel has also relied upon the decision of Tribunal in the case of Kanbay Software in his support but we see no support to assessee's case by this decision either. As a matter of fact, in this decision, the Tribunal referred to three mutually exclusive situations with regard to consequences of addition to income, by placing those three situations in three different baskets, and then analyzed position regarding imposition of penalty qua each of those situations. As evident from the following extracts from the decision, it has been clearly held that in a situation in which assessee is not able to prove his bona fides, the penalty is leviable: "51. There can be three distinct mutually exclusive situations in the case of an addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 271(1)(c). Indeed, even on the first principles and as seen in the above light, while this view is in accordance with the scheme of the section and the amendment brought about in the scheme of the section by insertion of Expln. 1 to s. 271(1)(c), it does not bring about any radical change to the main scheme of s. 271(1)(c) itself." 19. Learned counsel has stated that it is a case in which neither the existence of the leased assets is proved, nor is it disproved, and, therefore, it is not a fit case for imposition of penalty. That argument proceeds on the fallacy that unless Revenue authorities establish beyond doubt that leased asset did not exist, which will obviously amount to proving a negative, penalty cannot be imposed. It is elementary that none can be expected to prove a negative. The onus is on the assessee to prove his claim or at least give an acceptable explanation for his claim, and the assessee has failed on both of these counts. Learned counsel has also argued that the Revenue has not been able to establish mens rea of the assessee and it has failed to discharge the burden of proving falsity in the claim of the assessee. A reference was also made to Hon'ble Gujara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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