2008 (3) TMI 671 - HC - Income Tax

Levy of penalty under section 271(1)(c) - furnishing inaccurate particulars regarding the actual use of the two machines, for which depreciation was falsely or wrongly claimed in the return - Doctrine of mens rea - HELD THAT - It is not in dispute that the machinery has been leased to third party, who in fact, puts it to actual use. Insofar as the assessee is concerned, the machinery is put to use in the course of its business and that satisfies the condition for claiming depreciation. Hence, the claim for depreciation was neither illegal nor can it be said that was based on incorrect particulars. The withdrawal of the claim was on a mute acceptance of the impression given by the revenue that the assessee was not entitled to claim depreciation unless the machinery was actually used. Hence, the subsequent withdrawal did not result in any infraction either by way of concealment of income or on account of having furnished false particulars. In this regard, he would point out that several cases cited at the bar would have to be addressed in relation to the facts and circumstances of the given cases and the line of cases dealing with lease of machinery in the course of business, being considered as use of that machinery and which would be applicable to the assessee ought to be taken note of. Looking to the nature of business which the appellant has been carrying on, the actual user of the machines may not be necessary to be considered in this particular case. The actual user of the machines was by the hirers of the assessee who were handed over the respective machines at their work site for and on behalf of the assessee by TELCO directly. Obviously it was for the hirer who have used, the machinery looking to its own requirement and the job of work that it was doing. But that alone would not be sufficient to deprive the assessee from claiming depreciation on the said machines. As per the agreement entered into by the assessee with its hirers on 15-3-1994 and 29-3-1994, the machines were actually handed over to the hirers at their respective sites. Thus the assessee was not responsible or answerable as to from what dates they were put to actual use by them. Thus it will be equally true that non-user of the machines by the hirers of the assessee would not deprive the assessee from claiming depreciation on the said machines as it had fulfilled the two requirements for claiming depreciation, namely it had become the owner of the machines and the same were in turn leased out to different hirers before 31-3-1994. In fact, there was no need on the part of the assessee to have withdrawn its claim for depreciation for that particular assessment year. It appears that due to some ill advice given to the assessee, it proceeded to withdraw the same and claimed it in the next assessment year. However, this only establishes the bona fides of the assessee and the same cannot be doubted by us. In any case, it has not disputed by the revenue that assessee had become entitled to claim depreciation on the said machines in the next assessment year. This would further go to show that assessee had acted bona fide and the same could not have been doubted at all. The reasons assigned by CIT (A) appears to be well-founded and are based on correct legal proposition. The same could not have been reversed or upset by the Tribunal. Even if doctrine of mens rea is to be applied to the facts of this case, then after having gone through the facts of the case, we are of the considered opinion that conduct, behaviour and attitude of the assessee would show that mens rea is altogether missing. Then obviously assessee would not have exposed itself for levy of penalty as contemplated under section 271(1)(c) of the Act. That being the position, we answer in favour of the assessee and against the revenue. Consequently the order of the Tribunal is hereby set aside and quashed and the order of the CIT (A) is restored. Accordingly the appeal would stand disposed of.

Issues Involved:
1. Justification of the levy of penalty under section 271(1)(c) of the Income-tax Act.
2. Validity of the claim for depreciation on machinery for the assessment year 1994-95.

Detailed Analysis:

1. Justification of the Levy of Penalty under Section 271(1)(c) of the Income-tax Act:

Background and Legal Framework:
The appellant-assessee, a company engaged in leasing machinery, filed its return for the assessment year 1994-95 claiming depreciation on two machines. The Assessing Officer (AO) disallowed the claim based on further verification, concluding that the machines were not put to use before 31-3-1994. Consequently, the AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income.

Arguments and Judgments:
The appellant argued that the claim for depreciation was made under a bona fide belief that the machines were put to use before 31-3-1994. Upon realizing the machines were commissioned later, the appellant revised the return, withdrawing the depreciation claim. The appellant cited several cases, including CIT v. Shaan Finance (P.) Ltd. and CIT v. Reetu Finlease (P.) Ltd., to assert that machinery leased out is considered used for business purposes.

The respondent contended that the appellant had not become the owner of the machines before 31-3-1994 and that the machinery was not put to actual use, thus justifying the penalty. The respondent cited cases like Sir Shadilal Sugar & General Mills Ltd. v. CIT and K.P. Madhusudhanan v. CIT to argue that furnishing inaccurate particulars warranted penalty irrespective of mens rea.

Court's Analysis:
The court examined the legal provisions under section 271(1)(c) and relevant case laws. It noted that the appellant had acted on a bona fide belief and revised the return upon realizing the factual error. The court emphasized that the appellant's conduct did not exhibit mens rea or an intention to evade tax. The court also noted that the machinery was leased out, fulfilling the requirement for claiming depreciation.

Conclusion:
The court concluded that the appellant's actions were bona fide and did not warrant penalty under section 271(1)(c). The Tribunal's order was set aside, and the Commissioner of Income-tax (Appeals)'s order was restored, favoring the appellant.

2. Validity of the Claim for Depreciation on Machinery for the Assessment Year 1994-95:

Background and Legal Framework:
The appellant claimed depreciation on two machines, asserting they were purchased and commissioned before 31-3-1994. The AO disallowed the claim, concluding the machines were commissioned later based on further verification from TELCO.

Arguments and Judgments:
The appellant argued that the machinery was leased out and thus used for business purposes, citing cases like CIT v. Shaan Finance (P.) Ltd. and CIT v. Reetu Finlease (P.) Ltd. The appellant contended that leasing out machinery constitutes use for business, making the depreciation claim valid.

The respondent argued that the machinery was not put to actual use before 31-3-1994, and the appellant had not become the owner before the said date, thus invalidating the depreciation claim.

Court's Analysis:
The court examined the factual matrix and legal provisions under section 32 of the Act. It noted that the appellant had entered into lease agreements and handed over the machinery to hirers before 31-3-1994. The court emphasized that the actual user by the hirers suffices for claiming depreciation, and the appellant's bona fide belief in claiming depreciation was justified.

Conclusion:
The court concluded that the appellant was entitled to claim depreciation for the assessment year 1994-95, as the machinery was leased out and used for business purposes. The appellant's bona fide belief and subsequent actions did not warrant penalty. The Tribunal's order was set aside, and the Commissioner of Income-tax (Appeals)'s order was restored, favoring the appellant.

Final Judgment:
The court answered the questions of law in favor of the appellant and against the revenue. The Tribunal's order was set aside, and the Commissioner of Income-tax (Appeals)'s order was restored. The appeal was disposed of accordingly.

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