2012 (12) TMI 373 - HC - Income Tax

Court reinstates penalty under section 271(c) for unsubstantiated depreciation claim.

COMMISSIONER OF INCOME TAX DELHI IV Versus GOYAL MG GASES P. LTD.

The Court held that the Tribunal erred in deleting the penalty imposed by the Assessing Officer under section 271(c) of the Act. It found that the ... Imposition of Penalty u/s 271(1)(c) - furnishing inaccurate particulars of income - understatement of Income on sale of cylinders - Income on sale of cylinders - held that:- in the penalty proceedings,CIT(A) by order dated 30.3.1995 confirmed the imposition of penalty. - The Tribunal deleted the penalty held that:- tripartite agreement made by assessee cannot be considered as valid. persons who make claims of this nature, actuated by a mala-fide intention to evade tax otherwise payable by them would get away without paying tax legally payable by them, if their cases are not picked up for scrutiny. There can be no doubt that the assessee was aware of the true nature of the transaction, despite which the claim for depreciation was made. Its claim was rejected as sham, by this Court – that order has become final. The explanation given by the assessee for the depreciation claim, is neither bona-fide, nor substantiated - cancellation of penalty was unwarranted. The impugned order is accordingly set aside; the order of the AO imposing penalty is restored. Issues Involved:1. Whether the ITAT was correct in law in deleting the penalty of Rs. 47,68,180/- imposed by the Assessing Officer u/s 271(c) of the ActRs.2. Whether the ITAT was correct in law in deleting the penalty ignoring the material fact that the transaction was treated as sham by ITAT as well as by this court in the quantum proceedingsRs.Detailed Analysis:Issue 1: Deletion of Penalty by ITATThe assessee filed its return for the assessment year 1989-90 declaring an income of Rs. 23,74,987/-. The Assessing Officer assessed the income at Rs. 11,24,84,725/- which included disallowance of depreciation on computers purchased from Pertech Computers Ltd. (PCL) and leased back to Altos India Pvt. Ltd. The CIT(A) and the Income Tax Appellate Tribunal (ITAT) confirmed the disallowance. The AO imposed a penalty for understatement of income and bogus claim of depreciation. The Tribunal deleted the penalty regarding the sale value of cylinders and remanded the matter of depreciation on computers back to the AO for further examination. In the de novo penalty proceedings, the AO again imposed a penalty, which was canceled by the CIT(A) and upheld by the Tribunal.The Tribunal's decision was based on the fact that the assessee had furnished all relevant details and documents, and the disallowance of depreciation alone was not sufficient to attract penalty under section 271(1)(c). The Tribunal noted that the assessee had provided complete details of the transactions and lease rental income, which were accepted by the AO in subsequent assessments.Issue 2: Ignoring the Sham TransactionThe revenue argued that the Tribunal ignored the finding that the transactions were sham and mere paper transactions. The Tribunal had previously held that the transactions were improbable and not genuine. The CIT(A) and Tribunal, in the penalty proceedings, reasoned that the documentary evidence provided by the assessee was not disputed by the AO and that the disallowance of depreciation alone did not justify the imposition of penalty.The Court examined Explanation 1 to Section 271, which deems amounts added or disallowed in computing total income as concealed income if the explanation offered by the assessee is found to be false or unsubstantiated. The Court noted that the burden lay on the assessee to prove ownership and use of the computers. The Tribunal's earlier findings indicated that the transactions were circular and lacked genuine transfer of ownership.The Court found that the assessee's explanation regarding the ownership and use of the computers was unsubstantiated and mala fide. The assessee's claim of attempting to recover the computers and lease money did not substantiate the validity of the transactions. The Court referenced the Supreme Court's observation that taxing authorities are entitled to look into surrounding circumstances to determine the reality of transactions.The Court distinguished the present case from the Supreme Court decision in Reliance Petro-products, noting that the transactions were a sham and the assessee was aware of this. The Court also referenced the decision in Zoom Communication, emphasizing that claims must be bona fide and substantiated, and that making untenable claims could attract penalty under Section 271(1)(c).Conclusion:The Court concluded that the assessee was aware of the sham nature of the transactions and that the explanation for the depreciation claim was neither bona fide nor substantiated. Therefore, the cancellation of the penalty by the Tribunal was unwarranted. The Court set aside the impugned order and restored the AO's order imposing the penalty. The appeal was allowed with no costs.