Depreciation cannot be claimed without use of asset in the business

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘G’: NEW DELHI)

SHRI U.B.S. BEDI, JUDICIAL MEMBER

and

BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER

ITA No.680/Del./2012

(ASSESSMENT YEAR : 2003-04)

DCIT, Circle 11 (1),

New Delhi.

(APPELLANT)

Vs.

M/s. Speciality Food India (P) Ltd.,

 (Formerly known as Purnia Pet Care India Ltd.),

M – 5A, Connaught Place,

New Delhi.

(PAN: AAACE2226P)

 (RESPONDENT)

ASSESSEE BY: Shri Rupesh Jain, Advocate and Ms. Shaily Gupta, FCA

REVENUE BY: Smt. Renuka Jain Gupta, Senior DR

ORDER

PER B.C. MEENA, ACCOUNTANT MEMBER:

This appeal filed by the revenue emanates from the order of the CIT (Appeals)-XIII, New Delhi dated 01.11.2011 for the Assessment Year 2003- 04.

2. The assessee is a private limited company. During the year, it was engaged in the business of import, export, trade and otherwise deal in food, canned and tinned processed foods and foodstuffs and consumable provisions for human or animal consumption. The assessee was also engaged in the manufacturing operations, however, the same is stopped in the year 2000.

The return of income was filed declaring loss of Rs.4,32,89,050/- and the assessment was completed at a loss of Rs.2,02,34,254/- u/s 143(3) of the Income-tax Act, 1961 on 27.02,.2006. the penalty was initiated on the disallowance of depreciation of Rs.37,95,956/- claimed on plant and machinery. The penalty was levied of Rs.13,95,014/- being 100% of the tax to be evaded by order dated 31.03.2008.

3. The CIT (A) has granted the relief by holding as under:-

“6.4. I have considered the submissions of the ld. Counsel and the facts on record. As per the facts on record, the present case is not a case of detection of receipts not reflected in Profit and Loss account return of income or bogus expenditure booked in Profit and Loss or making of a false claim, which is prohibited by the statute and therefore against the tenets of the Act itself. In the appellant's case the issue is whether claiming of depreciation, in the facts and circumstances of the case would amount to filing of inaccurate particulars of income, particularly when the facts relating to the issue stand disclosed in the return of income.

6.5 It is seen that on application of explanation 1 to section 271(1)(c) in the instant case there is no concealment of income or filing of inaccurate particulars of income. The AO's view that appellant has filed in rate particulars of income by claiming the inadmissible depreciation, hence penalty u/s 271 (1)(c) is leviable cannot be upheld as a the appellant is found to not have defaulted under any of the sub clauses of explanation 18 to section 271(1)(c).

6.6 As per the appellant, the claim for depreciation for correctly made in the return as

(i) as activity of manufacturing of food products, was only temporarily suspended and

(ii) it had income from trading activity which was in the nature of business income, therefore the business activity was been carried on. The appellant' found adequate support in judicial precedents for making the claim of depreciation in such circumstances (as referred to in para 6.2 supra). The view taken by the AD and as upheld by the appellate authorities is on account of difference of opinion on interpretation of facts and application of law thereon. In the instant case the appellant has the year but in later years production shifted to animal food products, thus only temporary lull., business only downsized, depreciation claimed only on the retained fixed assets), the explanation given by the appellant has not been found to be malafide, the judicial rulings relied upon by the appellant did give it sufficient reason to believe that its claim for the depreciation was a bonafide one. In the return of income the appellant had disclosed that its long term business strategies were being revived and that it had losses, the sale of part of fixed assets (2/3rd) was also disclosed.

6.7 On almost similar issue of claim of lull in business/discontinuance of business/admissibility of deprecation when business not wound up / when company not wound up etc there are a plethora of judgments both in favour as well as against the assessee's as has been demonstrated in the submissions of the ld. Counsel referred to in para 6.2 supra. When a claim made in the return of income is disallowed on account of the issue being debatable, there being difference of opinion between the AO and the assessee on account of varying factual and legal interpretations which can be settled only by the higher judicial courts, then making of such a claim in the return of income will not amount to filing of inaccurate particulars of income as has been held by the Hon'ble Apex Court in the case of Reliance Petroproducts Pvt. Ltd. 322 ITR 158:-

"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 the Assessing Officer for any reason} the assessee will invite penalty under section 271 (1)(c). That is clearly not the intendment of the Legislature II”.

6.8 Similarly the Delhi High Court in the case of Zoom Communications Pvt. Ltd. 327 ITR 510 has observed that if the assessee has not concealed any material fact or the factual information given by the assessee has not been found to be incorrect, the assessee will not be liable to imposition of penalty u/s 271 (1)(c) even if the claim made by the assessee is unsustainable in law, provided that the assessee substantiates the explanation offered by it or the explanation even if not substantiated is found to be bonafide.

This judgment applies squarely in the case of the appellant as all material facts have been disclosed in the return of income and the explanation given for claiming the expenditure as revenue expenditure is a bonafide one (rulings in favour of the appellant on the issue of depreciation.

6.9 Furthermore it has been held in CIT vs. Eastern Medikit Ltd. by the Hon'ble Delhi High Court that no penalty is impossible when two views are possible. In the case of CIT vs Bacardi Martin India Ltd. 288 ITR 585 the Delhi High Court held that merely because there was a difference of opinion between the assessee and the AO it cannot be said that the assessee had intention to conceal income. Hon'ble Calcutta High Court in the case of Burmah Shell Oil Storage and Distributing Co. of India Ltd. vs. Income Tax Officer reported in 112 ITR 592 (Cal.) held as under:-

"Rejection of any legal contentions raised by any party and refusal to entertain any claim for deduction made on cogent legal grounds can never constitute concealment or furnishing of inaccurate particulars and no Income tax Officer can, therefore, be satisfied that an assessee has concealment his income or has furnished inaccurate particulars, only because the income-tax officer has chosen to reject the calculation on behalf of the assessee in support of the assessee's claim for deduction and has disallowed such claims for deduction put forward on legal grounds.

6.10 Further in the case of CIT VS. Harshwardhan Chemicals and Mineral Ltd. 259 ITR 112 (Raj.) the Hon'ble Appellate Tribunal deleted penalty by holding:

"Where an arguable, controversial or debatable deduction is claimed, the claim could not be said to be false, otherwise, it would become impossible for any assessee to raise any claims or deduction which might be debatable and it was not the intention of the Legislature to make punishable such claims, if they were not accepted."

On further appeal by revenue the Hon'ble Rajasthan High Court held as under:-

"Held affirming the decision of the Appellate Tribunal, that no penalty was leviable in view of the finding of the Tribunal that when the assessee had claimed deduction of an amount that was debatable it could not be said that the assessee had concealed any income or furnished inaccurate particulars for evasion of tax, and in view of the finding of the Tribunal no case was made out for interference."

6.11 The Hon'ble Supreme Court in case of CIT VS. Reliance Petroproducts P. Ltd. 322 ITR 158 has held that penalty u/s 271 (1)(c) will not lie merely if an incorrect! inadmissible claim has been made in the return and when all material facts having been disclosed in the return of income. The Hon'ble Court has observed as under:

“A glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The present is not a case of concealment of the income. That is not the case of the Revenue either. However, the Ld. Counsel for Revenue suggested that by making incorrect claim of the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word "particulars" is a detail or details (in plural sense); the details of a claim, or the separate items of an accounts. Therefore, the word "particulars" used in the section 271 (1) (c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The Ld. Counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income". We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars."

6.12 Recently the Hon'ble Delhi High Court in the case of Devsons Pvt. Ltd. vs. CIT 329 ITR 483 applying the ratio laid down by the Apex Court in the case of Reliance Petroproducts Pvt. Ltd. and Delhi High Court in the case of Bacardi Martin India Ltd. 288 ITR 585, Nath Brothers Exim International Pvt. Ltd. 288 ITR 670 held that penalty was not imposable u/s 271(1)(c) in a case where all particulars were disclosed by the assessee.

6.13 Respectfully following the ratio of the above judgments which have held that penalty is not imposable on debatable issues or claims/deductions disallowed on account of varying legal interpretations and where particulars have been disclosed by the assessee it is held that penalty u/s 271 (1)(c) is not imposable in the present case. Accordingly the penalty order u/s 271(1)(c) dated 31.03.2008 imposing the penalty of Rs.1395014/- is quashed.

In effect the appeal is treated as allowed for statistical purposes.”

4. Now, revenue is in appeal before us taking following grounds of appeal:-

“1. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the penalty imposed u/s 271(1)(c) of the I.T. Act, 1961, to the tune of Rs.13,95,014/-

2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.”

5. The only issue involved in the appeal is against the deleting of penalty imposed u/s 271(1)(c) of Income-tax Act, 1961 to the tune of Rs.13,95,014/-.

6. While pleading on behalf of the revenue, the ld. DR submitted that the assessee company has stopped manufacturing activities in the year 2000. The manufacturing activity has not started till date. The assessee has also sold land building and plant and machinery. Thus, there was no intention of assessee to restart the manufacturing activities. In such situation, claiming

depreciation on the WDV during the year was completely a false claim.

Therefore, the facts of assessee’s case are nearer to the facts in the case of CIT vs. Zoom Communications Pvt. Ltd. reported in 129 Taxman 179 (Delhi) where the Hon'ble Delhi High Court did not accept the plea of inadvertence in making claim for deduction of income-tax as the circumstances in which the claim was made could not be explained. Similarly, the facts also falls within the ratio of decision of Hon'ble Delhi High Court in the case of CIT vs. Gurbachan Lal reported in 250 ITR 157 where it was held that initially burden of discharging of the onus under Explanation 1 is on the assessee which automatically come into operation where explanation offered by the assessee was found false by the Assessing Officer. Further assessee has not furnished any satisfactory explanation as to why a prima facie inadmissible claim was made in the return of income. More so, there was no intention to restart the manufacturing activities. Since assessee has failed to give any satisfactory explanation for making the claim of depreciation in the return of income, it was patently a false claim which itself made assessee liable for levy of penalty u/s 271(1)(c). Ld. DR further submitted that the claim of depreciation during the year was not only inadmissible claim of deduction but it was

contrary to the plain words of the statue on which no two opinions are possible. On facts, this case is distinguishable from the facts of Reliance Petroproducts Pvt. Ltd. (supra). Therefore, assessee’s reliance on the Hon'ble Supreme Court decision in the case of Reliance Petroproducts Pvt. Limited – 322 ITR 158 is not of any help. By making false claims in the form of depreciation, an attempt has been made to reduce the taxable income and such action on the part of the assessee amounts to the furnishing inaccurate particulars of income. Therefore, CIT (A) was not justified in deleting the penalty u/s 271(1)(c) of the Income-tax Act, 1961. The audited accounts for the relevant financial period and the balance sheet and Schedule III in the fixed assets show that the leasehold land at the beginning of the year was

Rs.1,66,56,000/- and net block at the end of the year on 31.03.2007 was nil. Similarly, the WDV of the building at the end of the year was also nil. The WDV for plant and machinery at the beginning of the year was Rs.7,53,82,000/- and at the end of the year, the net block was only Rs.13,11,000/-. These facts clearly show that the assessee has sold majority of the plant and machinery and whole of building and land. These facts also show that there was no intention of the assessee to continue or restart the same business of manufacturing. The ld. DR submitted that the facts of the case are completely at variance from the facts of the case laws relied upon by the CIT (A). There was no arguable, controversial or debatable issue was involved. There was no legal contention involved in claiming the false depreciation. Therefore, the CIT (A) was not justified in deleting the penalty by holding that the issue was debatable on account of varying legal interpretation and the particulars have been disclosed by the assessee. The ld. DR pleaded to set aside the order of the CIT (A) and restore the order of the Assessing Officer.

7. On the other hand, the ld. AR submitted as under:-

The assessee was a private limited company. It was engaged in the form of manufacturing, trading and otherwise deal in food, meat, eggs, poultry, vegetables, canned and tinned processed foods and foodstuffs and consumable provision of every description for human or animal consumption.

The return was filed declaring a loss of Rs.4,32,89,050/-. The depreciation of Rs.37,95,956/- was claimed in the return of income. This depreciation was disallowed by the Assessing Officer. It was confirmed by the ITAT vide its order dated 23.12.2010 in ITA No.1460/Del/2008. Ld. AR submitted that although the assessee has not done any manufacturing activity during the year but depreciation was claimed on the plant and machinery on the premises that there is a temporary lull and assessee intends to start the manufacturing business. This manufacturing activity was temporarily suspended on account of the labour problem. The assessee resumed the business of trading in pet foods in the year 2005-06, therefore, there was no discontinuation of business of assessee so as to disallow the depreciation. The assessee has not concealed or filed any inaccurate particulars of income in respect of the depreciation claim. The disallowance was on account of bonafide difference of opinion between the assessee and the Assessing Officer, therefore, penalty u/s 271(1)(c) has been rightly deleted by CIT (A). Ld. AR relied on the case laws relied upon by the CIT (A) while deleting the penalty. The ld. AR relied on the following case laws:-

(i) CIT vs. Aretic Investments (P) Ltd. – 190 Taxman 157;

(ii) CIT v. Reliance Petroproducts Pvt. Ltd. – 322 ITR 158;

(iii) Decision of Hon'ble Delhi High Court in the case of CIT vs. Mahanagar Telephone Nigam Ltd. – ITA No.626/2011;

(iv) Decision of Hon'ble Delhi High Court in the case of CIT vs. Societex – ITA

No.1190/2011;

(v) CIT vs. Devsons Logistics Pvt. Ltd. – 329 ITR 483;

(vi) Decision of Hon'ble Delhi High Court in the case of CIT vs. Mahavir Irrigation (P) Ltd. – ITA No.1266/2009;

(vii) Decision of Hon'ble Delhi High Court in the case of ACIT vs. C&C Construction – ITA No.1492/2011;

(viii) CIT vs. Kriti Resorts (P) Ltd. – 243 CTR 341;

(ix) CIT vs. HMA Udyog Pvt. Ltd. – 159 Taxman 349;

(x) CIT vs. M/s. Auric Investment & Securities Ltd. – 301 ITR 121;

(xi) CIT vs. IFCI Limited – 328 ITR 611;

(xii) CIT vs. M.S. Bindra & Sons Pvt. Ltd. – 336 ITR 125;

(xiii) Narang International Hotel (P) Ltd. vs. DCIT – 137 ITD 53 (TM)

(xiv) CIT vs. Vibros Organics Ltd. – 159 Taxman 56.

8. We have considered the pleadings of both the sides. We have also perused the paper book filed by the ld. AR containing pages 1 to 112. We have also gone through the case laws relied upon by both the sides. The assessee was engaged in manufacturing and selling of food items. During the year, no manufacturing activity was carried out which was clear from the audited accounts where opening stock was nil and quantity manufactured during the year was also shown as nil. The assessee has stopped manufacturing activity in the year 2000. Assessee has not started manufacturing activity till date. Only the trading activity was resumed in the financial year ended on 31.03.2005 relevant to Assessment Year 2005-06. As per the Form 3CD attached with the return of income for the year under consideration, the Annexure 2 for Clause 14 of the Form the written down value of building other than residential building was of Rs.3,53,80,368/- as on 31.03.2002. Thus, this was opening WDV of building. However, as on 31.03.2003, the written down value of building is nil. This fact shows that building was sold out during the year. Assessee was not having factory, godown or office at the end of the year. In respect of plant and machinery, the written down value as on 31.03.2002 was Rs.2,76,38,427/-. As on 31.03.2003, the WDV was Rs.1,07,70,855/-. As per clause 32 of Form No.3CD, there has been no production during the year. The stock-in-trade at the end of the year was nil. Schedule 3 for fixed assets also show that the leasehold land and building were nil on 31.03.2003. All these facts clearly establish that stopping of manufacturing activity in the year 2000 was not on account of temporary lull in the business. The facts show that assessee was intended to close the manufacturing activities. This further established by th

fact that assessee has not started the manufacturing activity till date. The trading activity restarted in financial year 2004-05 was having nothing to do with the plant and machinery. These facts make the assessee’s case distinguishable from the case laws relied upon by the CIT (A) as well as ld. AR during the pleadings before us. The assessee has deliberately furnished inaccurate particulars of income by way of making false depreciation claim. In our considered view, the claim of depreciation on the plant and machinery was a prima facie inadmissible claim made in the return of income. Since the assessee has failed to make a satisfactory explanation for makings such patently false claim in the return of income, the CIT (A) was not at all justified in deleting the penalty. There is nothing on record which could establish that claim was due to varying legal interpretation. Therefore, we set aside the order of the CIT (A) and restore the order of Assessing Officer for levying the penalty u/s 271(1)(c) of the Income-tax Act, 1961.

9. In the result, the appeal of the revenue is allowed.

Order pronounced in open court on this 3rd day of May, 2013.

Sd/- Sd/-

(U.B.S. BEDI) (B.C. MEENA)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated the 3rd day of May, 2013

TS

Copy forwarded to:

1. Appellant

2. Respondent

3. CIT

4. CIT(A)-XIII, New Delhi.

5. CIT(ITAT), New Delhi.

AR, ITAT

NEW DELHI.