2013 (11) TMI 730 - HC - Income Tax

High Court upholds penalty for bogus transaction under Income Tax Act. Importance of verifying leased assets stressed.

COMMISSIONER OF INCOME TAX & DEPUTY COMMISSIONER OF INCOME TAX Versus M/s BPL SANYO FINANCE LTD

The High Court allowed the appeal filed by the revenue, upholding the penalty under Section 271(1)(c) of the Income Tax Act. The court found that the ... Penalty u/s 271(1)(c) of the Income tax act - Detection in the course of survey that 100% depreciation claimed in respect of the alleged sale and lease back from M/s.Bellary Steel and alloys Limited (for short “Bellary Steel”) was held to be false claim by the assessing authority - Whether levy of penalty under Section 271(1) (c) of the Act is legally sustainable in the light of the fact, which surfaced in the survey under Section 133-A of Act, that claim of 100% depreciation made by the respondent-assessee was not only false but was made in respect of non-existent goods, and that penalty is liable to be levied not only for concealing the income but also for furnishing inaccurate particulars – The respondent M/s.BPL Sanyo Finance Limited (for short “the assessee”) was in the leasing business. They had filed return of income for the assessment years 1997-98, i.e. for the financial year 1-4-1996 to 31-3-1997, on 28th November 1997 under Section 139, declaring a total income of Rs.1,26,50,375/- as applicable u/s 115JA of the Act - Till 13-3-2000, i.e., when the original assessment was made, the claim of the assessee was found acceptable and accepted as such. Held that:- It is the case of the revenue, in the present case that the information/particulars furnished in the return of Income filed for the assessment year 2002-03 was inaccurate - Assessee had claimed 100% depreciation on rolls, claiming that they had purchased the rolls from BM Steels Pvt. Ltd., (for short “BM Steel”) and leased to Bellary Steel. That led the concerned authority to conduct survey under Section 133-A of the Act at the premises of Bellary Steel on 1st June 2000. In the course of survey, various incriminating documents were seized/found. An inventory of rolls at the premises of Bellary Steel revealed that they had only 361 rolls in their stock as against 3702 rolls accounted both as purchased and leased by Financial institutions and leasing companies, like the assessee in the present case. Having regard to the admitted facts, the assessee could not and did not prove that he filed return due to fraud committed by Bellary Steel. On the facts and circumstances of the case, it cannot be stated that the assesee was completely innocent/ignorant of the fact that the assets/rolls were not in existence at all and that they claimed 100% depreciation in respect thereof without having any knowledge thereof. Similarly, it cannot be stated that the return filed was incorrect and it would not amount to furnishing inaccurate particulars or concealing of the income – Penalty levied u/s 271(1)(c) is correct – Decided in favor of Revenue. Issues Involved:1. Legality of the penalty under Section 271(1)(c) of the Income Tax Act, 1961 for concealment of income and furnishing inaccurate particulars.2. Whether the assessee was aware of the non-existence of assets and was a voluntary participant in a bogus lease transaction.Issue-wise Detailed Analysis:1. Legality of the penalty under Section 271(1)(c) of the Income Tax Act, 1961:The appeal was directed against the order of the Income Tax Appellate Tribunal (ITAT) which had partly allowed the respondent's appeal against the levy of penalty under Section 271(1)(c) of the Act. The penalty was initially levied by the Deputy Commissioner of Income Tax for claiming 100% depreciation on non-existent goods. The High Court had to examine whether the penalty was legally sustainable given the facts that surfaced during a survey under Section 133-A of the Act.The Tribunal had previously held that there was neither concealment of income nor furnishing of inaccurate particulars by the assessee. However, the High Court found that the Tribunal's observations were based on surmise and conjecture, and it failed to consider the relevant material on record. The High Court emphasized that the assessee was aware that they were claiming depreciation on non-existent assets and thus had furnished inaccurate particulars of income.2. Whether the assessee was aware of the non-existence of assets and was a voluntary participant in a bogus lease transaction:The Tribunal had concluded that the assessee was duped by Bellary Steel and was not a voluntary participant in a bogus lease transaction. It observed that the assessee had taken all necessary precautions, such as securing post-dated cheques, obtaining guarantees, and ensuring lease rentals were paid regularly. However, the High Court found this reasoning flawed, noting that the assessee, being the owner of the leased assets, had the responsibility to verify the existence and use of the assets.The High Court highlighted several points:- The assessee did not verify the capacity of the manufacturer or the transporter.- There was no physical verification of the leased assets.- The assessee had mechanisms for verifying leased assets, as indicated by the statement of their Vice President and the Auditor's report.- The Tribunal's assumption that the assessee acted in good faith was inconsistent with the evidence showing that the transaction was sham and intended to claim depreciation on non-existent assets.The High Court concluded that the assessee was aware of the non-existence of the assets and knowingly participated in the bogus lease transaction. The Tribunal's finding that the assessee was innocent and unaware of the fraud was based on inconsistent observations and did not align with the material evidence.Judgment:The High Court allowed the appeal filed by the revenue, holding that the penalty under Section 271(1)(c) was justified. The substantial question of law was answered in favor of the revenue, concluding that the assessee had concealed particulars of income and furnished inaccurate particulars. The High Court emphasized the importance of verifying the existence of leased assets and held that the assessee's conduct indicated awareness of the bogus nature of the transaction. The appeal was allowed with no order as to costs.