DEPRECIATION - AVOID LAST MOMENT PURCHASE OF NEW ASSETS to avoid doubts, disallowance, penalty and litigation a lesson from recent judgment on penalty.

[C.A. DEV KUMAR KOTHARI]

Earlier article:

In an article (titled DEPRECIATION - AVOID LAST MOMENT RUSH IN PURCHASING NEW ASSETS- IN VIEW OF FAST APPROACHING 2^nd October, 2008)  hosted on this  website on 31.07.08 the author has suggested that to avoid controversies, care should be taken to avoid last moment purchases on or just before cut off dates. As such purchase creates possibility of doubts and suspicion and un-necessary enquiry, disallowance, levy of penalty and proceedings for appeals. This suggestion does not require an opinion of expert however we find several cases in which the assets were purchased on the last moment and this invited litigation. In a recent case penalty was levied and the matter went to High Court.

Next cutoff date will be 31.03.2009:

For claiming depreciation for the new assets to be acquired in PYE 31.03.2009, it is necessary to establish that the asset is put to use on or before 31.03.2009. In this context the next cutoff date is 31.03.2009. Therefore, it is advisable to plan in advance and to purchase, install and put to use any such assets much before 31.03.09 to avoid a situation of suspicion. From analysis of judgments referred to in earlier article and the present article, it can be said that last moment rush can be costly affair.

Recent case on penalty:

In a case before Karnataka High Court matter came for penalty for disallowance of depreciation as the asset was purchased on the last date of the previous year (31.03.1994.) In case of Bhadra Advancing (P.) Ltd. V ACIT decided on 11.03.2008. In this case assessee had purchased a machine on 31.03.1994  for providing the same to its customer on lease basis. The supplier of machine delivered the same to the lessee, the lessee confirmed that he has received the machine on 31.03.94. The A.O. disallowed deprecation on the ground that the lessee has not put to use the machine during the year ended 31.03.1994. The A.O. also levied penalty under  section 271(1)(c) read with section 32, of the Income-tax Act, 1961 for the disallowed depreciation amounting to  concealment of income. According to assessee, said machines had been purchased before 31-3-1994 from 'T' which delivered said machinery directly to assessee's hirers on or before 31-3-1994 - On inquiry made by Assessing Officer, 'T' confirmed said fact.

Assessing Officer, however, disallowed assessee's claim of depreciation holding that said machines could not have been said to be put to use before 31-3-1994 - He also levied penalty under section 271(1)(c) upon assessee  holding that assessee had made false claim of depreciation in return of income.

The matter went to the high Court and the High Court held that looking to nature of business of assessee non-user of machines by hirers of assessee would not deprive assessee from claiming depreciation on said machines when it had fulfilled two requirements for claiming depreciation, namely it had become owner of machines and same had been leased out in course of assessee's business. Therefore  on facts, assessee's claim for depreciation could not be said to be wrong to justify penalty under section 271(1)(c).

Per author- It seems that the assessee had wrongly withdrawn claim for depreciation or did not purse the claim before appellate authorities. The assessee had put to use machines just when it is handed over to the lessee, because in case of lease business, providing of asset to lessee/ hirer the asset is put to use and also start earning revenue. In this regard the High Court has also noted as follows in paragraph 22:

             "In fact, there was no need on the part of the assessee to have withdrawn its claim for depreciation for that particular assessment year.  It appeared that due to some ill advice given to the assessee, it proceeded to withdraw the same and claimed it in the next assessment year.  However, that only established the bona fides of the assessee and the same could not be doubted.

Regarding penalty the court has noted, considered and held on the following lines:

a.           The assessee had taken those two machines on hire purchase agreements having been entered into between the assessee and 'S' for excavator and between the assessee and 'C' for crane. 

b.          The price of those two machines was actually paid by the financiers of the assessee to 'T'.  In the invoices issued by 'T', the assessee had been described as hirer.

c.            There was no dispute by the revenue that for the purpose of taxation, the assessee had been treated as owner of those machines.

d.           Coupled with that factual scenario, it was also to be noted that 'T' had also informed the revenue pursuant to the query made by the Assessing Officer, that the crane was commissioned at site of the hirer  of the assessee on 31-3-1994, whereas the excavator was commissioned at another site of the hirer of the assessee on 30-3-1994.

e.          Therefore, the assessee was under a bona fide belief that it had become entitled to claim depreciation on the aforesaid two machines in the relevant assessment year.  It, accordingly, proceeded to file its return claiming depreciation on those two machines.  However, later on, it withdrew claim of depreciation and filed fresh return.  Obviously, it claimed depreciation on the aforesaid machines in the next assessment order.

f.            There was nothing to hold about the non-genuineness of the documents on which reliance had been placed by the assessee, nor the documents on which reliance had been placed by the assessee could be said to be sham or bogus.

g.            Considering  the nature of business which the assessee had been carrying on, the actual user of the machines might not be necessary to be considered in that particular case.  The actual user of the machines was by the hirers of the assessee who were handed over the respective machines at their work site for and on behalf of the assessee by 'T' directly.  Obviously, it was for the hirer who had used the machinery looking to its own requirement and the job of work that it was doing.  But that alone would not be sufficient to deprive the assessee from claiming depreciation on the said machines.

h.          As per the agreements entered into by the assessee with its hirers on 15-3-1994 and 29-3-1994, the machines had actually been handed over to the hirers at their respective sites.

i.            The assessee was not responsible or answerable as to from what dates hirers  put to actual use the machines.

j.            Non-user of the machines by the hirers of the assessee would not deprive the assessee from claiming depreciation on the said machines as it had fulfilled the two requirements for claiming depreciation, namely it had become the owner of the machines and the same were in turn leased out to different hirers before 31-3-1994 ( this amount to use in the business of assessee).

k.           It had not been disputed by the revenue that the assessee had become entitled to claim depreciation on the said machines in the next assessment year.  That would further go to show that assessee had acted bona fide and the same could not have been doubted at all.

l.             The reasons assigned by Commissioner (Appeals) appeared to be well-founded and were based on correct legal proposition.  The same could not have been reversed or upset by the Tribunal.

m.        Even if doctrine of mens rea was to be applied to the facts of the instant case, conduct, behaviour and attitude of the assessee would show that mens-rea was altogether missing.  Then, obviously, assessee would not have exposed itself for levy of penalty as contemplated under section 271(1)(c).

In view of the above facts the order of the  Tribunal was  set aside and quashed and the order of the Commissioner (Appeals) was  restored. In conclusion it was held that the assessee was not liable to penalty u/s 271 (1) (c).

Conclusion:

This case again shows that planning and efforts should be made to avoid last moment rush and to purchase, take delivery, install and put to use assets well before the cut off dates. In the above case merely because assets were purchased on 30.03.94 and 31.03.94 the A.O. had doubted the transactions. Had it been say  even a week earlier say 24.03.94, perhaps the A.O. would have accepted the claim. Once the assets is purchased on or just before the cut off date, the authorities make efforts to find out some or other fault or lacunae to establish that the asset was not put to use or could not be used. 

Now again next cutoff date for this purpose, that is 31.03.2009 is approaching fast, therefore care should be taken to avoid last moment rush and try to purchase, install and put to use any  such assets much before that date.