2010 (1) TMI 777 - AT - Income Tax

Penalty under section 271(1)(c) - sick industrial company and for the year under consideration the actual production was NIL - AO was of the opinion that in order to avail deprecation asset must be used for the purpose of business during the relevant assessment year. Assessee s explanation is that though there was no production in the particular year but assets were kept ready for use and assessee undertook trading - Held that - An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation assessee s conduct cannot be said to be contumacious so as to entail levy of penalty under section 271(1)(c) Appeal allowed.

Summary

Issues:
Penalty under section 271(1)(c) for claiming depreciation on assets 'kept ready' for use.

Detailed Analysis:
The appeal was against the penalty imposed under section 271(1)(c) for claiming depreciation on assets 'kept ready' for use during the assessment year 2003-04. The Assessing Officer (AO) disallowed the depreciation claim as there was no production, stating that assets must be used for business to avail depreciation. The ld. CIT(A) upheld the penalty, stating that the assets must be put to use for depreciation claim as per section 32 of the Act.

The assessee argued that the depreciation claim for assets 'kept ready' was valid, citing the decision in CIT vs. Vibros Orgnics Ltd. where the Tribunal canceled penalty proceedings under section 271(1)(c) for a similar case. Another case, CIT vs. M/s Panacea Biotech Ltd., highlighted that passive use of assets in business qualifies for depreciation claim. The ld. DR relied on the lower authorities' orders.

The ITAT found that the assessee's conduct was not contumacious as there was no clear provision disallowing depreciation for assets 'kept ready' for use. Referring to the decision in Hindustan Steel vs. State of Orissa, the ITAT emphasized that penalties should not be imposed for technical breaches or when the offender believed they were acting lawfully. Therefore, the ITAT set aside the penalty under section 271(1)(c) based on the lack of clear provisions against claiming depreciation on assets 'kept ready' for use.

In conclusion, the ITAT allowed the appeal, deleting the penalty imposed under section 271(1)(c) of the IT Act. The judgment was delivered on 08/01/2010.