2022 (2) TMI 702 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of depreciation on plant machinery lease out to the tenant - HELD THAT - In the present case, the assessee throughout proceeding, the claim that the asset on which depreciation was claimed is existed and was sold only in AY 2018-19 and earned Short Term Capital Gains/Loss thereon was offered to tax. The assessee while filing its return of income offered the rental income as business income . Assessing Officer treated the rental income as business income primarily on the fact that the assessee was not doing any business activities and that plant machinery were not shown in the lease deed. The Hon'ble Jurisdictional High Court in ROYALE MANOR HOTELS IND. LTD. 2012 (8) TMI 1106 - GUJARAT HIGH COURT held that where there was no intention of the assessee to claim wrong deduction of depreciation on hotel building, and mistake was bona fide penalty could not be imposed. In present case as the claim of assessee is that they have let out its business premises to various parties alongwith plant machinery and income earned on letting out was offered for tax under the head business income from business profession and the assessee was under bonafide belief that the depreciation is allowable of the block of asset, we find merit in the submission of Ld. AR for the assessee that the assessee made a bonafide claim and mere disallowance thereof would not lead to conclusion that the assessee furnished inaccurate particulars. Thus, in view of the above factual and legal discussion, the grounds of appeal raised by the assessee are allowed.

Summary

Issues Involved:
1. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act.
2. Determination of whether the rental income should be classified as "business income" or "income from house property."
3. Legitimacy of the depreciation claim on plant and machinery.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c):
The primary issue was whether the penalty of ?7,55,913/- under Section 271(1)(c) of the Income Tax Act was justified. The assessee argued that the depreciation claim was made under a bona fide belief that it was allowable since the plant and machinery were let out along with the building. The Assessing Officer (A.O.) disallowed the depreciation, asserting that no business activities were carried out and the rental income should be classified as "income from house property." The A.O. initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The CIT(A)/NFAC upheld the penalty, citing the case of Sundaram Finance Ltd., where claiming depreciation on non-existent assets attracted penalty.

2. Classification of Rental Income:
The A.O. treated the rental income as "income from house property" instead of "business income," as the assessee had ceased its manufacturing operations and was only receiving rental income from letting out the premises. The assessee contended that the rental income was business income because the plant and machinery were also let out, although this was not mentioned in the lease agreements. The A.O. allowed a standard deduction of 30% on the rental income after rectifying the assessment order under Section 154.

3. Legitimacy of Depreciation Claim:
The assessee claimed depreciation on certain plant and machinery, arguing that these assets were part of a block of assets and were let out along with the building. The A.O. disallowed the depreciation, stating that the lease agreements did not mention the machinery and no business activities were conducted. The assessee maintained that the machinery was indeed let out and was later sold in AY 2018-19, with the resulting Short Term Capital Gain/Loss offered for taxation, thus proving the existence and use of the assets.

Tribunal's Findings:
The Tribunal considered the submissions and found merit in the assessee's claim that the depreciation was made in good faith. It noted that the assets existed and were later sold, with the gains/losses duly reported. The Tribunal highlighted that the mere disallowance of a claim does not automatically lead to a conclusion of furnishing inaccurate particulars. The Tribunal referred to the case of CIT vs. Reliance Petroproducts (P) Ltd., where it was held that a bona fide claim, even if disallowed, does not attract penalty under Section 271(1)(c).

Conclusion:
The Tribunal allowed the appeal, concluding that the assessee made a bona fide claim for depreciation and the penalty under Section 271(1)(c) was not warranted. It emphasized that the disallowance of depreciation did not equate to furnishing inaccurate particulars of income. The appeal was allowed, and the penalty was deleted.