2022 (9) TMI 1369 - AT - Income Tax

Penalty levied u/s. 271(1)(c) - Disallowance of deduction u/s 35E as none of the income was proved by the assessee was earned from the business of prospecting for or extraction/production of mineral eligible to claim - HELD THAT - It is seen from record that the assessee was granted mining lease for lignite for a period of 30 years in Bhavnagar District. There is also report from Gujarat Electricity Board and Mining Department, Government of Gujarat evidencing that the assessee is engaged in the prospecting activities for the minerals during the assessment year 2003-04. The assessee incurred necessary expenditures for this preliminary activities for the mining works and claimed u/s. 35E - assessee could not start commercial production within 5 years. The Co-ordinate Bench of this Tribunal has confirmed the disallowance u/s. 35E only on the ground that the assessee does not meet the parameters of eligibility prescribed within section 35E of the Act and the assessee also failed to commence the commercial production during the assessment year 2003-04. Lower Authorities failed to appreciate that the assessee has obtained mining rights from Government of Gujarat and the assessee also signed a letter of intent with Reliance Industries Ltd. for Development and sale of net electrical output generated to GEB. Thus it cannot be construed that inaccurate particulars have been furnished by the assessee to make a wrong claim u/s. 35E of the Act, thus does not warrant levy of penalty u/s. 271(1)(c) - It is undisputed fact that the lese of sale and leased back of LP Rotor Machines to GEB by the Assessing Officer but denied the benefit on the ground that no change of possession was taken place. Lower Authorities failed to consider that leasing activity is one of the objects of the assesse company and lease rent received has been treated as its business income and assessed to taxes. Consequently the assessee is entitled to claim depreciation on the leased machineries. The sale and leased back transaction entered into by the assessee with GEB which is nothing but an extension of financial assistance to GEB between two Public Sector Undertakings. In order to invoke the penalty proceedings under section 271(1)(c) of the Act, the Revenue should prove that the claim made was not sustainable in law and also the assessee had made a concealment of the particular income. In order to expose the assessee to penalty, the Revenue should show that there was contumacious conduct on the part of the assessee in suppressing the income in the return. The rejection of such a claim by the Appellate Tribunal does not amount to furnishing inaccurate particulars of income, thereby levying penalty u/s. 271(1)(c) of the Act as held by the Hon ble Supreme Court in the case of Reliance Petroproducts (P.) Pvt. 2010 (3) TMI 80 - SUPREME COURT Hon ble Madras High Court in the case of CIT vs. Cholamandalam Investment Finance Co. Ltd. 2014 (3) TMI 774 - MADRAS HIGH COURT held that where the A.O. failed to give independent finding that there was a deliberate design on the part of the assessee to inflate cost of acquisition so as to claim higher depreciation, penalty could not be imposed - thus penalty levied u/s. 271(1)(c) for furnishing inaccurate particulars of income is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 35E of the Income Tax Act, 1961.
2. Depreciation on sale and leaseback assets.
3. Penalty under Section 271(1)(c) for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Deduction under Section 35E of the Income Tax Act, 1961:

The assessee, a Public Sector Undertaking engaged in power generation, claimed a deduction of Rs. 35,37,800/- under Section 35E of the Act. The Assessing Officer (AO) noted that the income items such as Lease Rent, Lease Management Fee, and Lease Finance Income did not prove that the income was earned from prospecting, extraction, or production of minerals, which is necessary to claim the deduction under Section 35E. The assessee argued that it had a mining lease for lignite and was engaged in prospecting activities, supported by reports from the Gujarat Electricity Board and the Mining Department of Gujarat. However, the AO disallowed the deduction, stating that the assessee failed to commence commercial production within five years, a requirement under Section 35E.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, and the ITAT also confirmed it, stating that the assessee did not provide evidence of commercial production. The CIT(A) further noted that the Tribunal found the assessee had not substantiated its claim, thus making a false claim under Section 35E.

2. Depreciation on Sale and Leaseback Assets:

The assessee entered into a sale and leaseback transaction with the Gujarat Electricity Board (GEB) involving an LP Rotor Machine. The AO disallowed the depreciation claim of Rs. 2 crores, arguing that there was no actual change of possession or ownership, rendering the transaction a colorable device. The CIT(A) and ITAT upheld this disallowance, noting that the transaction was intended to infuse funds into GEB without genuine transfer of ownership or use of the asset.

3. Penalty under Section 271(1)(c) for furnishing inaccurate particulars of income:

The AO initiated penalty proceedings under Section 271(1)(c) for both the disallowed deduction under Section 35E and the depreciation on leased assets. The CIT(A) confirmed the penalty, relying on Supreme Court judgments, including Sundaram Finance Ltd., which upheld penalties for claiming depreciation on non-existing assets. The CIT(A) noted that the assessee's claim of no deliberate intention to avoid taxes was not acceptable, as the Tribunal found no evidence of commercial production, and the leaseback transaction was not genuine.

The assessee argued that being a 100% State Government Undertaking, there was no intention to avoid tax, and the claims were based on a difference of opinion in interpreting the law. The assessee cited Supreme Court judgments, including CIT vs. Reliance Petroproducts Pvt. Ltd., which held that merely making an incorrect claim in law does not amount to furnishing inaccurate particulars of income.

Tribunal's Findings:

The Tribunal noted that the assessee had obtained mining rights and incurred expenses for preliminary mining activities, supported by reports from the Gujarat Electricity Board and the Mining Department. The Tribunal found that the leaseback transaction was an extension of financial assistance between two Public Sector Undertakings, and the lease rent was treated as business income. The Tribunal emphasized that for penalty under Section 271(1)(c), the Revenue must prove that the claim was not sustainable in law and that the assessee had concealed income. The Tribunal cited the Supreme Court judgment in Reliance Petroproducts, which held that making an incorrect claim does not amount to furnishing inaccurate particulars.

The Tribunal concluded that the penalty was not justified, as the claims were based on genuine transactions and supported by evidence. The Tribunal also distinguished the present case from the Supreme Court judgments relied upon by the CIT(A), noting that there was no dispute about the existence of leased machinery and the transactions were financial in nature.

Conclusion:

The Tribunal deleted the penalty under Section 271(1)(c) for furnishing inaccurate particulars of income, allowing the assessee's appeals. The Tribunal emphasized that the claims were based on genuine transactions and supported by evidence, and merely making an incorrect claim does not warrant penalty under Section 271(1)(c).