2012 (12) TMI 457 - HC - Income Tax

Penalty u/s 271(1)(c) - wrong claim of depreciation - ITAT deleted the penalty - held that - This is a case where questionable details and particulars relating to the claim were furnished by the assessee and such details were so fundamental to the genuineness and bona fide of the claim that the mere furnishing of those particulars made the claim vulnerable. In this background, we are wholly unable to countenance the observations of the Tribunal that the assessee had purchased the property for the purpose of its business and sold it in the following year when it found the property not suitable for its commercial activities. We are also unable to subscribe to the view of the Tribunal that the explanation submitted by the assessee appears to be bona fide and all the facts were on record and nothing has been concealed therein . The Tribunal failed to appreciate the claim of the assessee for what it is. It completely missed the fact that there was no evidence to show that the property was used for the purpose of the assessee s business during the relevant previous year. Penalty confirmed - Decided against the assessee.

Summary

Issues Involved:
1. Legitimacy of the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961.
2. Whether the property was used for the purpose of the assessee's business.
3. Bona fides of the claim for depreciation on the property including the cost of land.

Issue-wise Detailed Analysis:

1. Legitimacy of the Penalty Imposed under Section 271(1)(c):
The case revolves around the penalty of Rs.14,46,239/- imposed by the assessing officer under Section 271(1)(c) of the Income Tax Act, 1961, which was initially confirmed by the CIT (Appeals) but later deleted by the Tribunal. The High Court was tasked with determining whether the Tribunal erred in law by deleting this penalty.

2. Whether the Property was Used for the Purpose of the Assessee's Business:
The assessee, a private limited company, claimed depreciation on a property purchased and subsequently sold within a short period. The assessing officer found that the property was residential and had not been used for business purposes, as evidenced by local inquiries and the fact that the property remained vacant. The Tribunal, however, accepted the assessee's explanation that the property was intended for business but was sold later due to unsuitability for commercial activities. The High Court disagreed with the Tribunal, emphasizing the lack of evidence showing the property was used for business purposes and noting the short holding period and the use of borrowed funds indicated a motive for short-term gains.

3. Bona Fides of the Claim for Depreciation on the Property Including the Cost of Land:
The assessing officer disallowed the depreciation claim, noting that it included the cost of land, which is not depreciable under the Act. The assessee's explanation was that the claim was bona fide and made per the Income Tax Rules, with full disclosure of particulars. The Tribunal found the explanation satisfactory and canceled the penalty. However, the High Court found the claim to be not bona fide, highlighting the inclusion of land cost in the depreciation claim and the lack of evidence for business use of the property. The High Court referred to the Supreme Court's judgment in CIT vs. Alps Theatre, which established that no depreciation is allowable on land, thereby reinforcing the non-bona fide nature of the claim.

Conclusion:
The High Court found the Tribunal's decision to cancel the penalty unjustified, noting that the Tribunal failed to address the findings of the income tax authorities adequately. The High Court emphasized the lack of evidence for business use of the property and the improper inclusion of land cost in the depreciation claim. Consequently, the High Court answered the substantial question of law in favor of the revenue, reinstating the penalty imposed by the assessing officer and confirmed by the CIT (Appeals). The appeal of the revenue was allowed with no order as to costs.