2014 (3) TMI 398 - HC - Income Tax

Cancellation of penalty u/s 271(1)(c) of the Act Manufacturing activity stopped Claim of depreciation rejected - Held that - The assessee could not be said to be lacking in bonafide when it made the claim for depreciation because at that stage, its intention to abandon the manufacturing activity was not in fact crystallized Relying upon Addl. CIT v. Rajindra Flour and Allied Industries P. Ltd. 1980 (9) TMI 75 - DELHI High Court - the intention of the assessee not to carry-on manufacturing activity was in fact borne out not only in the order in question but also in subsequent orders and that the claim for depreciation was inherent and known - Thus, it attracted Section 271(1)(c) of the Act - The claims of depreciation is also to be viewed in the light of the block of assets concept introduced w.e.f. the assessment year 1988-89 Decided in favour of Assessee.

Summary

Issues:
- Reversal of order cancelling penalty under Section 271(1)(c) of the Income Tax Act by the Income Tax Appellate Tribunal (ITAT).

Analysis:
1. The case involved an assessee engaged in manufacturing and trading foodstuff who claimed depreciation disallowed by the Assessing Officer (AO). The penalty proceedings were initiated under Section 271(1)(c) of the Income Tax Act. The CIT (Appeals) cancelled the penalty, citing debatable nature of the depreciation claim. The Tribunal reversed this decision, emphasizing no production as per Form 3CD. The assessee argued that its intention to abandon manufacturing was not crystallized, citing judicial precedents like CIT v. Reliance Petroproducts. The Revenue contended the claim was not bona fide due to known intentions. The CIT (Appeals) found the claim bonafide based on explanations and disclosed strategies, leading to a debate on the claim's accuracy.

2. The CIT (Appeals) determined the bona fide of the assessee by considering the temporary suspension of manufacturing activity and the existence of business income from trading. The appellant's explanation, supported by judicial precedents, was deemed not malafide. Various judgments were cited on the issue of business lull and admissibility of depreciation, emphasizing the debatable nature of such claims. The CIT (Appeals) held that the claim, even if unsustainable in law, did not attract penalty under Section 271(1)(c) if the explanation was bonafide and all material facts were disclosed.

3. The High Court analyzed the CIT(A)'s reasoning, finding the question of abandonment of business and the claim for depreciation debatable. The Tribunal erred in second-guessing the CIT(A) at the appellate stage, especially considering settled legal positions and previous judgments. The concept of "block of assets" introduced from 1988-89 was discussed, questioning the necessity of machinery for depreciation claims. Ultimately, the Court held in favor of the assessee, setting aside the Tribunal's order and allowing the appeal based on the debatable nature of the issues involved.

This detailed analysis highlights the key arguments, legal interpretations, and precedents considered in the judgment, providing a comprehensive understanding of the case and its implications regarding the reversal of the penalty under Section 271(1)(c) of the Income Tax Act.