TaxTMI 
TaxTMI 
2010 (4) TMI 673
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....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 (AE, in short) for a consideration of Rs. 1,00,20,400, and leased out to Duckfin. When the AO put this claim to his rigorous scrutiny, he did not find everything in order. Duckfin and AE were not traceable and the summons issued to them were returned back undelivered by the postal authorities. When the assessee was confronted with this fact, it was submitted by the assessee that the lease transaction was arranged through Fiduciary Capital & Financial Services Ltd. and that the assessee is not in a position to give further details about Duckfin or AE. The AO then conducted enquiries with the bank in which Duckfin was maintaining account, and it was learnt that the said account was operated by Anil Bhargava, CMD, Sunil Bhargava, Jt. CMD, Deepak Bhargava Director-Finance and Dilip Bhargava. One of them, i.e., Deepak Bhargava, as further investigations with the banker revealed, was also proprie....
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....eciation, 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 asset was never purchased from AE, rather the money was passed on to the Duckfin, the alleged lessee-through its conduit AE, and in a gap of two to three days, the amount of Rs. 86,67,646 out of the leased amount of Rs. 1,00,20,400 has come back to the same group of companies". Once it was held that the assets never existed and that the lease was a bogus transaction, depreciation claimed on the furnace, which was claimed to have been leased out, was also declined. Aggrieved, inter alia, by this disallowance of Rs. 1,00,20,400 on account of depreciation, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) confirmed the findings of the AO and concluded that "only a paper transaction was carried out to defraud the Revenue". When the matter finally travelled before a Co-ordinate Bench of this Tribunal, the assessee did not press the grievance against th....
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....s 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-called rental. The plea is absurd and is logically not tenable. Therefore, I am of the view that the entire amount in these two years had no nexus with the so-called lease transaction, which had been established by the AO as non-existent. The amounts were purely receipts for which the appellant had no satisfactory explanation and hence the entire amount had been incorrectly explained. Nonetheless, it is only obvious that inaccurate particulars had been furnished with regard to the said income. Therefore, I confirm the AO's decision that the said amount was also one in respect of which the appellant, I am convinced, deserves to be penalized." 6. The assessee is not satisfied with the stand so taken by the learned CIT(A) and is in further appeal before us. 7. Shri Hiro Rai, learned counsel for the assessee, submits that the assessee has filed enough evidences to support his bona fides and su....
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....t 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) 122 TTJ (Pune) 721 : (2009) 22 DTR (Pune)(Trib) 481, and submits that in view of the legal position as summed up therein, it is not a fit case for imposition of penalty under s. 271(1)(c). Learned counsel submits that it is not a case in which the stand of the assessee has been proved to be false as the AO himself, in the impugned penalty order, observes that "the assessee has not been able to substantiate the claim". It is thus a situation in which the transaction has not been proved by the assessee, but it has not been disproved either. No element of falsity is established by the AO, and all the reasonable requisitions of the AO have been duly complied with. Learned counsel takes us through the assessment order with a view to highlight that at one place, the AO has used the expression "after investigations with Duckfin" which establishes that Duckfin did exist al some point of time and the inve....
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....ar 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 respectively, and submitted that this quantum of returned income demonstrates the bona fides of the assessee and that no useful purpose could be served by assessee's resorting to unethical maneuvering. Without prejudice to these arguments, and to learned counsel's submission that it was not a fit case for imposition of penalty at all, it is also contended that in any event what tax is sought to be evaded must be computed on the basis of net revenue loss i.e., after taking into taxable incomes as a result of the alleged bogus lease transaction as a whole. It is also pointed out that the penalty was imposed in respect of three quantum additions out of which the remaining two, i.e., other than depreciations disallowed, have already been deleted in appeal. The quantum of penalty is to be modified, even if the penalty is confirmed in principle. We are thus urged to vacate, or at least modify, the imp....
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....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 situation would have been Rs. 24 lakhs plus equipment's residual value, if any. The assessee now proceeds on the basis that it was a financial lease which implies that the assessee was to get Rs. 24 lakhs for time value of money used by Duckfin. In reality, however, Duckfin did not use the funds so borrowed at all. On the contrary, Duckfin effectively prepaid all the lease instalments at net present value to assessee's sister concern VCIL by getting the same discounted for Rs. 86,67,646. If Duckfin was to use the borrowed funds, it would have paid Rs. 24 lakhs as interest, but when Duckfin decides to prepay the loan, by getting it discounted on NPV through assessee's undisputed sister concern, Duckfin gets discounting of Rs. 40 lakhs. This circular transaction has resulted in a Rs. 15 lakhs plus loss by lending Rs. 102 lakhs to Duckfin for 3 days. The assessee has sought to justify the VCIL being ....
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....nbsp; 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 lakh....
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....epreciation of Rs. 102 lakhs, the assessee had returned 'nil' income and thus evaded tax on his actual income. As regards the assessee's claim that it was a case of financial lease, and not operational lease, we are of the view that once CIT(A) holds that this was an entirely bogus transaction, and that findings remain uncontested, it cannot be open to the assessee to now contend that it was a financial lease. In any event, and particularly having noted the money trail as above, we share learned CIT(A)'s perception. We are not persuaded by assessee's submission that it was a genuine leasing transaction. 13. We also see no merits in assessee's plea that there is no concealment of income at all in the sense that whole transaction is tax neutral over a period of time, and in view of Hon'ble Bombay High Court's judgment in the case of Hind Rajasthan Construction Co. it is not a fit case for imposition of penalty. In the case of Hind Rajasthan Construction Co., Hon'ble Bombay High Court were in seisin of a situation in which Tribunal had given a categorical finding to the effect that the shifting of income from one assessment year to another assessment year was due to an accounting pol....
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....ssee wants to trust him with an order of Rs. 1.02 crores worth of machine. As later investigations revealed, the bank statement of the vendor established that he was merely a conduit for transfer of money to Duckfin, and eventually to a group company of the assessee. This is coupled with the fact that these documents are in connection with a tripartite transaction in which assessee group loses Rs. 15 lakhs plus on a 3 days financing of Rs. 102 lakhs. As for the chartered accountant's certificate said to have been relied upon by the assessee, it has also been obtained by the alleged vendor of non-existent machinery and a lessee whose conduct has not been, to put it very mildly, above board and which inspires little confidence. The chartered accountant's certificate obtained or organized by these persons of substandard morality, particularly without even an effort of direct or independent verification by the assessee, could not have been sufficient for the assessee to believe that the machinery actually existed at site-unless, of course, the assessee itself was a willing party to this complex maneuvering to reduce the tax liability for the assessment year before us. The question that....
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....n held by the Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC) 'the taxing authorities are not required to put blinkers while looking at the documents produced before them' and that 'they are entitled to look into the surrounding circumstances to find out the reality of recitals. made in those documents'. Their Lordships further observed that science has not yet invented any instrument to test the reliability of evidence placed before a Court or Tribunal and, therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. In our considered view, it is contrary to human probabilities that merely in view of invoice and delivery challan issued by the vendor and chartered accountant's certificate furnished by the lessee, and disregarding the true nature of transaction, the assessee genuinely believed that the leased assets did exist. We reject this explanation. 18. As regards learned counsel's reliance on Hon'ble Supreme Court judgment in the case of Reliance Petroproducts, we have noticed that it was a case in which their Lordships were only concerned with the question whe....
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....or can be reasonably inferred, that the assessee's conduct and explanation is bona fide. In such a situation, in the light of Hon'ble Supreme Court's judgment in the case of Dilip Shroff, penalty under s. 271(1)(c) could not have been levied since the onus of establishing mens rea of the assessee could not have been discharged in such a situation. However, as the law stands now and in the light of the Hon'ble Supreme Court's judgment in the case of Dharamendra Textile Processors, penalty under s. 271(1)(c) will be leviable since it is not necessary for the tax authorities to establish mens rea of the assessee. That is the area in which legal position has changed. However, there is still a third scenario in which an addition is made to the income but it is established, or can be reasonably inferred, that assessee's conduct and explanation is bona fide. These are the situations in which the assessee is able to establish his innocence. In such a situation, in accordance with the undisputed scheme of s. 271(1)(c), neither the penalty was leviable prior to Hon'ble Supreme Court's judgment in the case of Dilip Shroff, nor is it leviable after the Dharamendra Textile Processors' case. 52....
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....ssions is that in view of Hon'ble Supreme Court's judgment in the case of Dharamendra Textile Processors (2008) 219 CTR (SC) 617 : (2008) 14 DTR (SC) 114 : (2008) 306 ITR 277 (SC), once the mandate of s. 271(1)(c), read with Explanations thereto, are satisfied. there is no further onus on the AO to establish mens rea". The assessee has not satisfactorily discharged the onus of proving his bona fides with regard to claim of depreciation on assets which did not exist, and, accordingly, following the Kanbay Software decision, we hold that it is a fit case for imposition of penalty. We are also not impressed by assessee's claim that considering his returned income. he had no good reasons to get into any manoeuvring to avoid genuine tax liability. These arguments lack any substance and any legally sustainable merits. As for learned counsel's reliance on Tribunal's decision in the case of BPL Sanyo Finance Ltd., that is a decision in which Tribunal has given a finding that the assessee was 'duped by systematic fraud' and it was done in the normal course of his business whereas in the present case we are of the view that the assessee entered into a complex tripartite lease transaction whi....