2013 (6) TMI 279 - HC - Income Tax

Penalty u/s 271(1)(c) - evidence of the valuer report - AO came to a conclusion that the real value of the machinery was concealed by claiming 100% depreciation and furnished inaccurate particulars - sham transaction - lease - Held that - the penalty under Section 271(1)(c) is a civil liability, but it does not relieve the assessee from the liability as the object behind the enactment of the said section is to provide for a remedy for loss of revenue. It is no doubt true that in every case where the claim made by the assessee is not accepted by the Assessing Officer for any reason, the asseesee will be levied penalty is not the intend of the Legislature and it would depend upon the facts of every case. But, the aforesaid decision will not come to the aid of the assessee as in the said case no fault was found in the particulars furnished by the assessee, whereas it is not so in the case on hand. Therefore, with respect, the aforesaid cases would not apply to the facts of the present case. The Tribunal, without appreciating the facts of the case in an appropriate manner, had came to a strange conclusion that the departmental presumption is only based upon the statement given by the valuer and such valuation cannot be the basis for levy of penalty. The finding of the authorities based on the evidence of the valuer, which was corroborated by the circumstantial evidence and the background of the case, are not presumptive as has been concluded by the Tribunal. - Levy of penalty confirmed - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the Income Tax Appellate Tribunal's decision to set aside the orders of the authorities and delete the penalty under Section 271(1)(c) of the Income-tax Act.
2. Assessment of whether the withdrawal of the depreciation claim by the assessee was voluntary.
3. Examination of whether the assessee had colluded with the lessee to finance a sham transaction.
4. Determination of the presence of mens rea (guilty mind) in the transaction.

Issue-Wise Analysis:

1. Validity of the Income Tax Appellate Tribunal's Decision:
The High Court scrutinized the Tribunal's decision, which had reversed the findings of the authorities by holding that the documentary evidence and the sequence of events did not prove that the assessee had colluded with the lessee to finance a sham transaction. The Tribunal concluded that mens rea was not palpable in this case. However, the High Court found that the Tribunal's decision was based on a flawed understanding of the evidence and the circumstantial background provided by the authorities. The Tribunal's reliance on the statement of the valuer to dismiss the penalty was deemed inappropriate by the High Court.

2. Voluntariness of the Withdrawal of Depreciation Claim:
The High Court examined the timing and circumstances of the assessee's withdrawal of the depreciation claim. The assessee argued that the withdrawal was voluntary and made to show bona fides, as it occurred before the Department issued any notice. However, the High Court noted that the withdrawal occurred just three days before the Department's scrutiny notice, suggesting that it was not a voluntary act but a preemptive measure taken in anticipation of the Department's action. The High Court held that this indicated the assessee's awareness of the potential liability and the impending enquiry.

3. Collusion and Sham Transaction:
The High Court assessed whether the assessee had colluded with the lessee to finance a sham transaction. The authorities had found that the machinery imported was of Indian origin but misdeclared as foreign origin, and the transaction was not genuine. The High Court noted that the valuer had informed the assessee's officials that the machinery was of Indian make and would not cost much. Despite this knowledge, the assessee claimed 100% depreciation on the machinery. The High Court concluded that the assessee's actions, including collecting a significant collateral amount, indicated a possible awareness of the machinery's true value and origin, thereby suggesting complicity in the sham transaction.

4. Presence of Mens Rea:
The High Court evaluated the presence of mens rea in the transaction. The Tribunal had dismissed the penalty on the grounds that mens rea was not evident. However, the High Court found that the authorities' findings, based on the valuer's statement and corroborated by circumstantial evidence, indicated that the assessee was aware of the machinery's true origin and value. The High Court held that the assessee's actions, including the timing of the withdrawal of the depreciation claim and the collection of collateral, demonstrated a guilty mind and an attempt to conceal the true nature of the transaction.

Conclusion:
The High Court concluded that the Tribunal had erred in setting aside the orders of the authorities and deleting the penalty under Section 271(1)(c) of the Income-tax Act. The Tribunal's decision was based on an incorrect assessment of the evidence and the circumstances. The High Court upheld the authorities' findings that the assessee had concealed the true value and origin of the machinery and had colluded with the lessee in a sham transaction. The substantial questions of law were answered in favor of the Revenue, and the appeal was allowed.