2010 (4) TMI 673 - AT - Income Tax

Penalty - False Claim For Depreciation - The CIT(A) confirmed the findings of the AO and concluded that only a paper transaction was carried out to defraud the Revenue - Mere making of an incorrect claim, as is the settled legal position in view of Hon ble Supreme Court s judgment in the case of CIT vs. Reliance Petroproducts Ltd. (2010 -TMI - 75701 - SUPREME COURT) could not be visited with penal consequences under s. 271(1)(c) of the Act - The lease in question was a sham transaction, as has been the uncontroverted and unchallenged finding of the CIT(A), and right from inception. as evident from the tripartite arrangement as well, the transaction did not have any commercial motive - it is case of the assessee that the income which is sought to be concealed at best could be depreciation claim as reduced by the interest component of lease instalment which is brought to tax - Impugned penalty is levied - The appeal is dismissed

Issues Involved:
1. Validity of penalty under Section 271(1)(c) of the IT Act, 1961.
2. Legitimacy of the disallowance of depreciation claimed by the assessee.
3. Assessment of the assessee's explanation and evidence regarding the lease transaction.
4. Evaluation of the assessee's bona fides and the genuineness of the lease transaction.
5. Appropriateness of the quantum of penalty imposed.

Issue-wise Detailed Analysis:

1. Validity of Penalty under Section 271(1)(c) of the IT Act, 1961:
The primary issue was whether the CIT(A) was correct in upholding the penalty of Rs. 53,69,892 imposed on the assessee under Section 271(1)(c) for the assessment year 1996-97. The penalty was imposed on the grounds that the depreciation claim of Rs. 1,00,20,400 was based on bogus invoices for non-existing assets. The assessee's failure to provide a valid explanation and the inference that the assessee had no valid explanation to offer led to the imposition of the penalty.

2. Legitimacy of the Disallowance of Depreciation Claimed by the Assessee:
The penalty was related to the disallowance of depreciation on a 'fully automatic heated tunnel furnace' leased to Duckfin International Ltd. The furnace was claimed to have been purchased from Associated Engineers, but both Duckfin and AE were untraceable. The AO's investigation revealed that the transaction was circular, with the money being routed back to a company within the assessee's group. The AO concluded that the lease transaction was bogus and the asset never existed, leading to the disallowance of the depreciation claim.

3. Assessment of the Assessee's Explanation and Evidence Regarding the Lease Transaction:
The assessee submitted various documents, including an invoice, delivery challan, and a certificate from a chartered accountant, to substantiate the lease transaction. However, the AO and CIT(A) found these documents insufficient to prove the genuineness of the transaction. The AO noted that the transaction was arranged through a broker, and the assessee could not provide further details about Duckfin or AE. The CIT(A) observed that the entire transaction was a paper transaction intended to defraud the revenue.

4. Evaluation of the Assessee's Bona Fides and the Genuineness of the Lease Transaction:
The assessee argued that the lease transaction was genuine and that the depreciation claim was made in good faith. However, the AO and CIT(A) found that the transaction lacked commercial substance and was intended to avail depreciation on a non-existing asset. The tripartite agreement with VCIL, a group company, further raised doubts about the bona fides of the transaction. The Tribunal concluded that the lease transaction was a sham and that the assessee's explanation was not credible.

5. Appropriateness of the Quantum of Penalty Imposed:
The penalty was initially imposed on three additions, but only the disallowance of depreciation survived. The Tribunal upheld the penalty in principle but directed the AO to recompute the penalty based on the surviving addition. The Tribunal rejected the assessee's argument that the penalty should be reduced by the interest component of the lease rental brought to tax, as the authorities had found the lease to be bogus.

Conclusion:
The Tribunal upheld the penalty under Section 271(1)(c) for the disallowance of depreciation, finding that the lease transaction was a sham and that the assessee had failed to provide a credible explanation. The matter was remanded to the AO for recomputation of the penalty based on the surviving addition. The appeal was dismissed, subject to the limited purpose of fresh quantification of the penalty.

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