2015 (2) TMI 728 - HC - Income Tax

Penalty under section 271(1)(c) - disallowance of depreciation - ITAT confirmed penalty levy - Held that - So long as the assessee has not concealed any material fact or the factual information given by him, has not been found to be incorrect, he will not be liable for imposition of penalty under section 271(1)(c) of the Act even if the claim made by him is unsustainable in law provided that he either substantiates the explanation offered by him or the explanation is found to be bona fide. A claim made by the assessee needs to be bona fide and if the claim, besides being incorrect in law, is mala fide, Explanation 1 to section 271(1)(c) would come into play and work to the disadvantage of the assessee. We have already observed hereinabove and the finding of the Income-tax Appellate Tribunal, which is a final fact finding authority that the assessee claimed depreciation which was never allowable and the assessee was aware of the true nature of the transaction despite which the claim for depreciation was made. Its claim was rejected by the Tribunal in the quantum proceedings and that order has attained finality. The explanation given by the assessee for the claim of depreciation is neither bona fide nor substantiated. All these are on the basis of appreciation of evidence on record found by the lower authorities and thus, the impugned order is based on appreciation of evidence and has been reached on a finding of fact. No perversity or illegality in the order of the Income-tax Appellate Tribunal. - Decided against assessee.

Summary

Issues Involved:
1. Sustenance of penalty under section 271(1)(c) of the Income-tax Act, 1961.
2. Validity of the disallowance of depreciation claimed by the appellant-assessee.
3. Whether the transaction between the appellant-assessee and its holding company was a colourable device.
4. Adequacy of the appellant-assessee's response to the penalty proceedings.
5. Applicability of section 35AB of the Income-tax Act.
6. Timeliness of the penalty order under section 275(1)(a) of the Income-tax Act.

Detailed Analysis:

1. Sustenance of Penalty under Section 271(1)(c):
The penalty under section 271(1)(c) can be imposed if the assessee has concealed the particulars of income or furnished inaccurate particulars. The court noted that all three authorities (Assessing Officer, Commissioner of Income-tax (Appeals), and Income-tax Appellate Tribunal) concluded that the appellant-assessee intended to evade tax. The ITAT specifically found that the transaction was a "colourable device" and thus upheld the penalty. The appellant-assessee failed to provide a satisfactory explanation to counter these findings.

2. Validity of the Disallowance of Depreciation:
The appellant-assessee claimed depreciation on technical know-how, which was disallowed by the Assessing Officer and upheld by the CIT(A) and ITAT. The court noted that the technical know-how was never actually used by the appellant-assessee but by its holding company, Punsumi India Ltd. The authorities found that the transaction was merely on paper and not substantiated by actual usage, hence the depreciation claim was invalid.

3. Colourable Device:
The court agreed with the findings of the lower authorities that the transaction between the appellant-assessee and Punsumi India Ltd. was a sham. The technical know-how was not genuinely transferred or used, and the entire transaction was orchestrated to evade taxes. The ITAT found that the technical know-how was not patented and was a common technology, further supporting the conclusion that the transaction was a paper exercise.

4. Adequacy of Appellant-Assessee's Response:
The appellant-assessee did not provide a sufficient response during the penalty proceedings. Despite being given opportunities, the appellant-assessee failed to submit adequate material to counter the findings of the Assessing Officer. The court noted that the appellant-assessee merely sought to defer the matter and did not discharge the burden of proof that shifted to it after the ITAT's findings.

5. Applicability of Section 35AB:
The appellant-assessee argued that the claim could be allowable under section 35AB, which allows one-sixth of the total cost to be claimed over six years. However, the court found that this claim was not raised during the assessment or penalty proceedings and was only mentioned by the Assessing Officer in passing. The court held that this did not constitute an admission by the Assessing Officer and rejected this argument.

6. Timeliness of the Penalty Order:
The appellant-assessee contended that the penalty order was time-barred under section 275(1)(a). The court rejected this claim, noting that the penalty could be imposed within six months from the end of the month in which the order of the Commissioner (Appeals) or the ITAT is received by the Chief Commissioner or Commissioner. The court found that the appellant-assessee raised this issue for the first time before the High Court and thus it was not entertained.

Conclusion:
The court dismissed all four appeals, finding no merit in the appellant-assessee's arguments. The findings of the lower authorities were based on a thorough appreciation of evidence, and no substantial question of law arose from the ITAT's order. The penalty under section 271(1)(c) was upheld, and the disallowance of depreciation was confirmed as the transaction was found to be a sham. The appellant-assessee's arguments regarding section 35AB and the timeliness of the penalty order were also rejected.