Casuarina Capital and Finance Private Limited V. The Deputy Commissioner of Income Tax, Central Circle \\u2013 II, Hyderabad

ITTA/8/2005

AI Insights

The case revolves around the dispute concerning the depreciation claimed by Casuarina Capital and Finance Private Limited (formerly GVK Petro Chemicals Pvt. Ltd.) on Pollution Control Equipment purchased from its sister concern, Novopan Industries Limited. The primary legal issue was whether the assessee was entitled to claim depreciation on the actual purchase price of the equipment, which was significantly higher than its written down value (WDV) in the books of Novopan, given that Novopan had substantial carry-forward losses. The Income Tax Department initially disallowed the excess depreciation claimed and later imposed a penalty for alleged concealment of income. The CIT(A) set aside the penalty, but the Tribunal reinstated it, leading to the present appeal.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 815898 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 05-07-2012
• Assessment Year: misc
• Other Referred Cases: Dilip N. Shroff, Karta v. Joint Commissioner of Income Tax, Special Range Mumbai and Anr., T. Ashok Pai v. Commissioner of Income Tax, Bangalore, Commissioner of Income Tax, Ahmedabad v. Reliance Petroproducts Pvt. Ltd., Union of India v. Dharamendra Textile Processors
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Concealment of income; Depreciation; Inaccurate particulars; Income Tax; Pollution control equipment; Lease-back Transaction
• Section: 143(2); 271(1)(c); 143; 43(1); 260-A

Judgement Text

"THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE N. RAVI SHANKAR I.T.T.A.No.8 of 2005 Date : 05th day of July, 2012 Between : Casuarina Capital and Finance Private Limited, (Formerly GVK Petro Chemicals Pvt. Ltd.) having its registered office at 156 – 159, “Paigah House”, Sardar Patel Road, Secunderabad – 500 003. … Petitioner/Appellant And The Deputy Commissioner of Income Tax, Central Circle – II, Hyderabad. … Respondent/Respondent THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE N. RAVI SHANKAR I.T.T.A.No.8 of 2005 ORDER : [Per JUSTICE GODA RAGHURAM] The assessee has preferred this appeal under Section 260- A of the Income Tax Act, 1961, (the ‘Act’), aggrieved by the order dated 21.12.2004 of the Income Tax Appellate Tribunal, Hyderabad, Bench ‘A’, in I.T.A.No.433/Hyd/2000, for the assessment year 1996-97. All through the proceedings up to the Tribunal, the name of the assessee was M/s. GVK PETRO Chemicals Private Limited which had also filed this appeal. By the order of this Court dated 20-06-2012 in I.T.T.A.M.P.No.263 of 2012, the cause-title in the appeal was amended substituting the name of the assessee to read Casuarina Capital and Finance Pvt. Ltd. The relevant chronology of facts : (a) The appellant is the assessee, a company engaged in the business of manufacture and sale of resins and chemicals and one of the group companies of GVK group. The assessee purchased Pollution Control Equipment from M/s. Novopan Industries Limited, another of the group of companies, during the relevant assessment year for Rs.62,63,000/-, as against Rs.12,53,433.00 - the value as on 01-04-1995 in the books of Novopan. Novopan had brought forward huge losses to the tune of nearly Rupees Twenty crores as on 01-04-1995. (b) For the relevant assessment year the assessee filed its return of income disclosing a net income of Rs.3,36,116/-. The same was taken up for scrutiny and processing under Section – 143. A notice dated 19-03-1999 was issued by the Revenue under Section – 143(2). The notice stated that during the course of assessment proceedings it was observed that the assessee had entered into a sale and lease-back transaction for Pollution Control Equipment with M/s.Novopan Industries Limited – a sister concern of the assessee; that verification of the records of M/s.Novopan revealed that the plant and machinery was sold at an enhanced cost, i.e., for Rs.62,63,000/- as against the Written Down Value (WDV) as on 01.04.1995, of Rs.12,53,433/-; that the assessee has claimed 100% depreciation on Rs.62,63,000/-; that as Novopan already availed the benefit of depreciation on the asset, the assessee must show cause why its claim of depreciation be not restricted to the WDV of Rs.12,53,433/-, invoking the explanation under Section 43(1). (c) On 25.03.1999, the assessee responded to the notice and asserted : (i) that the asset was valued by the registered valuer by the seller company (Novopan), a listed company and was sold as per the valuation; (ii) the assessee had accordingly purchased the asset for Rs.62,63,000/- and claimed depreciation on the actual cost; (iii) in view of the notice however, the assessee volunteers to offer the resultant additional income; (iv) the difference between the actual cost and the book value be treated as a financial transaction reducing the lease rentals; and (v) a revised return of income is being separately filed. The assessee concluded by stating that the additional income is offered purely on a voluntary basis with a view to achieving finality of the assessment and to avoid prolonged litigation and expects no penal action would be initiated. (d) After referring to the notice issued by the Revenue and the response of the assessee thereto, the assessing officer disallowed the excess claim of depreciation. After setting off the lease rentals received during the year, assessment order dated 30.03.1999 was passed determining the balance liability to tax. The assessee preferred no appeal. It is the admitted factual scenario that the order of assessment has attained finality. (e) On 26.07.1999, Revenue issued a show cause notice, why penalty be not levied under Section 271 (1) (C) of the Act. In response, on 30.08.1999 the assessee stated that it had explained during the assessment proceedings that under a bona fide impression that the actual cost of the asset would be the actual price paid for the acquisition depreciation was claimed, particularly in view of the fact that the asset was purchased at the value arrived by a registered valuer; that however, the assessee voluntarily accepted to adopt the cost of the asset at the WDV of the asset in the hands of the previous owner. The assessee concluded by asserting that in the circumstances no element of concealment was involved and reiterated what was stated in its earlier letter dated 25.03.1999, i.e., that as the additional income is offered on voluntary basis only with a view to facilitate finality of the assessment and avoid prolonged litigation no penal action be initiated. The assessee prayed for rescinding the penalty proceedings. (f) Eventually, orders of penalty were passed on 30.09.1999 under Section 271(1)(C) of the Act levying a specified penalty. The reasons recorded in the penalty proceedings may be summarized : (i) The assessee’s contention that it was under the genuine impression that the actual cost of the asset was the actual price paid for its acquisition is not correct since the assessee was in business for long and had knowledge of Explanation 3 to Section 43(1) but was pretending ignorance of this provision; (ii) the assessee was aware of the value of the asset before and at the time of its purchase, from its sister concern Novopan; (iii) the value recorded by the registered valuer in the valuation report is not material in view of the specific provision [Explanation 3 to Section 43(1)]; (iv) the defense as to voluntary acceptance of the assessee is of no consequence since the false claim for depreciation on the inflated cost of the asset was first detected by the Revenue and only thereafter the assessee came forward to admit the same; (v) the assessee deliberately claimed depreciation on the inflated purchase price, ignoring the provisions of Explanation 3 to Section 43(1); and later offered the additional income to tax, not voluntarily but after detection by the Revenue and issue of show-cause notice. Hence the transaction is a planned or collusive one designed by the assessee and its sister concern (Novopan) to evade tax; and (vi) penalty is therefore leviable. (g) An appeal preferred by the assessee was allowed on 24.03.2000. The reasons recorded by the CIT(A) are : (i) The fact that the assessee had purchased the asset from Novopan at the value determined by the registered valuer and this value is also reflected in the books of account of the seller Novopan, is not in dispute and genuineness of the lease agreement cannot therefore be disputed; (ii) Explanation 3 to Section 43(1) does not provide that if any assessee purchases an asset at more than the WDV, the claim of depreciation on the enhanced cost must be rejected in all circumstances and the WDV should alone must be taken as the actual cost; (iii) The pre-condition for invoking Explanation 3 to Section 43(1) is that the assessing officer must be satisfied that the main purpose of the transfer of the asset was to reduce its tax liability and if the intention, of reducing the tax liability cannot be established, the claim of depreciation on the enhanced cost cannot be denied; (iv) Since the assessee as well as the seller Novopan were sister concerns and it was assumed that by selling the asset at a higher price the tax burden of the seller did not increase (due to Novopan’s huge accumulated losses) and there would be a reduction of the tax liability of the assessee, which assumption is legitimate and not a colourable device; and there being no concealment of income nor furnishing of inaccurate particulars, invocation of the penalty provisions under Section 271(1)(C) of the Act was not warranted; and (v) While Explanation 3 to Section 43(1) empowers the assessing officer to take the WDV of an asset as the actual cost to the buyer, the buyer is however not required to follow this provision on his own and claim depreciation only on the WDV. This deficiency in Explanation 3 was noticed and rectified by introducing Explanation – 4(A) w.e.f. 01.10.1996, applicable from the assessment year 1997-98. The penalty order was set aside. (h) The Revenue preferred an appeal to the Tribunal which was allowed by the order dated 21-12-2004 in I.T.A.No.433/HYD/2000. The Tribunal noticed certain facts and observed that: (i) On 05.07.1995, the assessee’s Board of Directors resolved to lease the Pollution Control Equipment for an amount not exceeding Rs.65,00,000/-; (ii) On 04.09.1995 Novopan raised an invoice for Rs.31,41,000/- for sale of the Pollution Control Equipment to the assessee; and another invoice on 08.09.1995 for Rs.31,22,000/-; (iii) On 17.09.1995 the equipment leasing agreement was entered into between the assessee and Novopan for a total consideration of Rs.93,94,500/-, spread over a period of five years; (iv) In view of the aforesaid sequence of events, the Tribunal concluded that the transaction was not a genuine transaction; the assessee consciously and deliberately made a false claim of depreciation and thus concealed the income and also furnished inaccurate particulars of the income. Only after being confronted, the assessee filed revised returns, i.e., after detection by the department and therefore there was no element of voluntary disclosure; (I) Sri S. Ravi, learned senior counsel for the appellant/assessee contended that the Tribunal erred in holding that the transaction in question was a sham; such conclusion is perverse as the Tribunal ignored the findings of the assessing officer and proceeded to make out a new case which was not the case of the Revenue, either in the assessment, in penalty proceedings or even before the Tribunal; and (J) The Tribunal erred in failing to notice that the assessing officer had not concluded that the assessee had exaggerated the claim for depreciation by inflating the cost of acquisition. On behalf of the appellant/assessee judgments of the Supreme Court in (1) Dilip N. Shroff, Karta v. Joint Commissioner of Income Tax, Special Range Mumbai and Anr.[1]; (2) T. Ashok Pai v. Commissioner of Income Tax, Bangalore[2] ; (3) Commissioner of Income Tax, Ahmedabad v. Reliance Petroproducts Pvt. Ltd.[3] were referred to. In Dilip N. Shroff the Court considered the expressions “conceal” and “inaccurate particulars” (employed in Section 271) and held inter alia that in order to attract penalty under Section 271(1)(C) mens rea was a necessary ingredient, since “inaccurate” signified deliberate act or omission on the part of the assessee. The principles initiated in Dilip N. Shroff were reiterated in T. Ashok Pai. The ruling in Dilip N. Shroff that mens rea is a necessary ingredient for an offence, under Section 271(1)(C), was reversed in Union of India v. Dharamendra Textile Processors[4] and the Court concluded that Section 271(1)(C), enacted strict liability for concealment or furnishing inaccurate particulars while filing the return and no mens rea was required. The Court held that the provision was intended to remedy loss of revenue and penalty being a civil liability, willful concealment was not an essential ingredient as in the case of prosecution under Section 276(C) of the Act. Reliance Petroproducts Pvt. Ltd. noticed earlier decisions of the Supreme Court including Dilip N. Shroff and Dharamendra Textile Processors and observed that while overruling the judgment in Dilip N. Shroff only to the extent of applicability of mens rea, the Supreme Court did not find fault with the reasoning in Dilip N. Shroff where the Court explained the meaning of the terms “concealment” and “inaccurate particulars”. The rationes and the principles following from the above precedents, relevant to the present appeal may be summarized : (a) “Concealment” signifies a deliberate act or omission on the part of the assessee or a direct attempt to hide an item of income or a portion thereof from the knowledge of the income tax authorities; (b) “furnishing of inaccurate particulars” is not to be inferred on the mere furnishing of an assessment of the value of the property, which is not acceptable or has not been accepted by the assessing officer. Even where Explanation 3 to Section 43(1) is taken recourse to, the assessing officer must arrive at a finding (in the penalty proceedings) that the explanation offered by the assessee was false and the assessee must be found to have failed to prove that such explanation is not only bona fide but all the facts relating to the same and material to the income, were not disclosed; (c) The primary burden of proof (of concealment or of furnishing inaccurate particulars) is on the department and the assessing officer must be satisfied that there is primary evidence to establish concealment of income or furnishing of inaccurate particulars; and the assessing officer must not begin with the presumption that the assessee is guilty. Only when the primary burden of proof is discharged by the department, the secondary burden of proof would shift to the assessee, since proceedings under Section 271(1)(C) are penal are nature; (d) A finding in an assessment proceedings that a particular receipt is income cannot automatically be adopted in penalty proceedings though such finding may constitute good evidence; in penalty proceedings the authority must consider the matter afresh as the trajectory of assessment and penal proceedings, are distinct. The following observations in Dharamendra Textile Processors afford guidance to a proper analyses of the validity of the penal proceedings which are the subject matter of this appeal. These observations read: It was tried to be suggested that Section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing Officer – had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(C). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(C). That is clearly not the intendment of the Legislature. (emphasis is supplied) As can be seen from the facts and circumstances of the present appeal, considered in the light of the decisions cited supra, there was neither concealment of income nor furnishing of inaccurate particulars. The mere fact that the assessing authority refused to accept depreciation on the actual value for which the Pollution Control Equipment was purchased by the assessee from Novopan and issued notice to bring to tax the amount constituting the difference in the depreciation value between the WDV in the books of Novopan and the value for which it was purchased by the assessee; and on such notice being issued, the assessee volunteered liability to tax, per se would not amount to concealment. No question of furnishing of inaccurate particulars was involved either. Neither in the assessment proceedings nor in the penalty proceedings nor even in the notice preceding the assessment was the entire transaction assumed to be a sham and nominal transaction and there was no proposal for or disallowance of depreciation altogether. In the aforesaid circumstances, the order of the Tribunal reversing the well considered order of the CIT(A) is erroneous and unsustainable. The Tribunal totally ignored the findings of the assessing officer and proceeded under an erroneous assumption that the transaction itself was sham. This appeal is accordingly allowed. The order of the Tribunal dated 21.12.2004 in I.T.A.No.433/Hyd/2000 is set aside and the order dated 24.03.2000 of the Commissioner of Income Tax (Appeals), Hyderabad, is restored. No order as to costs. ___________________ Justice G. Raghuram _____________________ Justice N. Ravi Shankar Date : 05th July, 2012. Ndr/* [1] (2007) 291 ITR 519 (SC) [2] (2007) 292.ITR.11(SC) [3] (2010) 11 SCC 762 [4] 2008 (13) SCC 369 "