Db Income Tax Appeal v. The Commissioner Of Income Tax-I & Anr

DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR *** (1)DB Income Tax Appeal No.104/2012M/s. Punsumi Engineers LimitedM/s. Punsumi Engineers Limited Vs. The Commissioner of Income Tax-I & anr. (2)DB Income Tax Appeal No.101/2012M/s. Punsumi Engineers LimitedVs.M/s. Punsumi Engineers LimitedVs. The Commissioner of Income Tax-I & anr. (3)D.B. Income Tax Appeal No.102/2012M/s. Punsumi Engineers LimitedVs.M/s. Punsumi Engineers LimitedVs. The Commissioner of Income Tax-I & anr. (4)D.B. Income Tax Appeal No.103/2012M/s. Punsumi Engineers LimitedVs.M/s. Punsumi Engineers LimitedVs. The Commissioner of Income Tax-I & anr. Date of Order:- 19/08/2014 HON'BLE MR. JUSTICE AJAY RASTOGI.HON'BLE MR. JUSTICE J.K. RANKA. None present for the appellant. Mr. Kamlesh Kumar Meena, Assistant Commissioner, Circle-3,Jaipur, present in person for respondents. BY THE COURT (Per Hon'ble Ranka, J.): 1.These four Income Tax Appeals are directed against thecommon order dt.07/10/2011 passed by the Income TaxAppellate Tribunal, Jaipur Bench, Jaipur (for short, “ITAT”) bywhich the ITAT, while upholding the order passed by theCommissioner of Income Tax (Appeal) (for short, “CIT(A)”), hasdismissed the appeals filed by the appellant-assessee. It DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 2 relates to Assessment Year 1994-95, 1995-96, 1996-97 & 1997-98. The appellant-assessee in these appeals is aggrievedagainst sustenance of the penalty u/s 271(1)(c) of the IncomeTax Act, 1961 (for short, “IT Act”). Since the issues involved aresimilar and identical for all these years, all these appeals arebeing decided by this common order. However, facts are beingtaken of DB ITA No.104/2012 for the assessment year 1995-96as the ITAT has also chosen to take facts of assessment year1995-96. 2.These appeals were listed on 13[th] August, 2014 and onthe said date, one Mr. Ashvini Chaturvedi, representative of theappellant appeared in person and the matter was argued by himat some length but he sought further time to prepare the matterand considering his request, the matter was adjourned fortoday, however, no one appeared on behalf of the appellant. 3.Since, no one is putting appearance on behalf of theappellant despite being aware of the matter being listed todayand the lawyer representing the appellant is also aware of listingof matter today but lawyers are also abstaining from attendingthe Court without any cogent reason. We have heard theOfficer, appearing on behalf of the respondents and perusedthe impugned order so also the material available on record. 3 4.The salient features of the case are that the appellant-assessee is 100% subsidiary of M/s. Punsumi India Ltd.. Theappellant-assessee was formed for manufacturing of DiscCovers which were being used in Aluminum ElectrolyticCapacitors. The appellant-assessee though imported plant &machinery from Germany and such plant & machinery thoughreached Mumbai but was lying with the Custom Department atMumbai and it is a finding of fact that such plant & machinerynever reached the site/workshop/head office of the appellant-assessee and finding no other alternative to recover the customduty, demurrage and other charges, the Mumbai PortAuthorities sold/auctioned the plant & machinery. It was statedby the appellant-assessee that due to financial problems, itcould not clear the dues of port authorities and thus the portauthorities had to sell the same. 5.The appellant-assessee entered into a memorandum ofunderstanding (MOU) on 05/10/1992 with the holding company(Punsumi India Ltd.) and as per this agreement, the appellant-assessee acquired technical knowhow for manufacturing ofstitching and winding machines for the manufacture ofElectrolytes. The consideration for acquiring technical knowhowfor manufacture of stitching and winding machines was Rs.400 5.The appellant-assessee entered into a memorandum ofunderstanding (MOU) on 05/10/1992 with the holding company(Punsumi India Ltd.) and as per this agreement, the appellant-assessee acquired technical knowhow for manufacturing ofstitching and winding machines for the manufacture ofElectrolytes. The consideration for acquiring technical knowhowfor manufacture of stitching and winding machines was Rs.400 DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 4 lacs while the consideration for acquiring technical knowhow formanufacture of Electrolytes amounted to Rs.250 lacs. SuchMOU was signed by Shri V.K. Bhargava, Chairman of theappellant-assessee and Shri H.C. Chopra, President ofPunsumi India Ltd. Both the persons are also directors of theappellant-assessee. The appellant-assessee capitalized theentire amount of Rs. 650 lacs and claimed depreciation.However, a finding of fact is confirmed by the authorities thatnothing was manufactured by the appellant-assessee by usingthe aforesaid technical knowhow. The appellant-assessee againentered into another MOU on 20/04/1993 signed by the samepersons in the same capacity according to which Punsumi IndiaLtd. was to manufacture machinery by using the aforesaidtechnical knowhow owned by the appellant-assessee. It was,however, agreed that Punsumi India Ltd. will pay royalty to theappellant-assessee on certain specific rates. During the courseof the assessment proceedings, queries were raised by theAssessing Officer (for short, “AO”) with reference to the claim ofdepreciation on the basis of the above fact. The AO also prima-facie came to the conclusion that the agreement, as enteredinto by and between the two companies, i.e. the appellant- with100% holding company of the appellant being Punsumi IndiaLtd., was a transaction only on papers and in-fact everythingwas being shown by way of book adjustments. Finding the DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 5 aforesaid being a paper transaction, a specific query was raisedby the AO to the appellant-company as to whether theappellant-assessee is entitled to claim of depreciation on thiscount. However, it was submitted on behalf of the appellant-assessee that they have shown royalty income in pursuance tothe agreement amounting to Rs.7,98,915/- as also job chargesto the extent of Rs.6,47,837/- against which depreciation to thetune of Rs.1,22,50,341/- was claimed. In furtherance of thequery, so raised by the AO, the AO desiredjustification/genuineness of job work and the AO, during thecourse of investigation, recorded statements of Shri NarendraSingh Negi and Shri Kewal Kishan and it was found by the AOthat they were employees of Punsumi India Ltd. prior to theirworking with the appellant and they have been appointed tolook after the factory and hence machinery was kept there. Itwas also reiterated by them that the salary was being paid tothem by Punsumi India Ltd. and books of accounts of theappellant-assessee are also being written by Shri UrveshSinghal, who is also on the pay roll of Punsumi India Ltd..Finding flaw in the submissions as also the other facts namely;power consumption, deployment of workers, financial and otherfactors, the AO came to the conclusion that this was a device toevade tax and to justify the claim of depreciation which hasbeen planned and executed by both the directors named above DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 6who are also directors in the holding company. In theassessment order, in addition to the above issues, the AOobserved that the amount shown by way of job charges to thetune of Rs.6,47,837/- and royalty to the tune of Rs.7,98,915/- isso small/meager which proved that the transaction in betweenthe two was a colourable transaction. It was also observed bythe AO in the assessment order that against the technicalknowhow, the charges of Rs.650 lacs payable by the appellant-assessee, Punsumi India Ltd, had acquired shares worthRs.500 lacs of the appellant-assessee and balance was shownoutstanding. Accordingly, the AO disallowed the depreciation inthe assessment order passed on 23/02/1998. 6.The matter was carried in appeal by the assessee beforethe CIT(A). The CIT(A) sustained disallowance of depreciationon the facts found and after considering the material on record,held that the assessee, in-fact, had not acquired technicalknowhow and subsequently the technical knowhow was notused by the appellant and the technical knowhow, if any, wasused by the transferor i.e. Punsumi India Ltd. and it was furtherobserved by the CIT(A) that it is doubtful whether Punsumi IndiaLtd. itself had any technical knowhow as they had not soldtechnical knowhow to any other company. Dissatisfied with thesaid sustenance of disallowance, appeal was preferred by the DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 7appellant before the ITAT and the ITAT also vide order dt.26/05/2005 upheld the findings of the CIT(A). No further appealwas preferred before this Court and thus disallowance ofdepreciation in all the assessment years attained finality. 7.Consequent to order of the ITAT, the AO issued showcause notice u/s 271(1)(c) of the IT Act requiring the appellant-assessee to substantiate its claim that the depreciation wasrightly claimed by it particularly on the basis of order of the CIT(A) as well as ITAT, who had sustained disallowance ofdepreciation and when the said issue attained finality. Noadequate reply was submitted on the instant issue by theassessee and it was merely submitted that the issue may bedecided after disposal of the rectification application. It hasbeen observed by the AO that the assessee did not place anymaterial during the course of the penalty proceedings and afterconsidering the order of the ITAT where the disallowance ofdepreciation was sustained and by observing the materialalready placed on record, the penalty u/s 271(1)(c) of the Actwas imposed for all the assessment years. The penalty soimposed had been challenged in appeal before the CIT(A). TheCIT(A) also upheld the penalty and came to the conclusion thatthe assessee was not able to controvert the finding of fact in theassessment proceedings that the transaction was a colourable DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 8device merely on papers and upheld the penalty. Dissatisfiedwith the sustenance of the said penalty, the matter was carriedin appeal before the ITAT and the ITAT vide impugned order dt.07/10/2011 has upheld the finding of the CIT(A) after analyzingthe evidence on record as also the case laws relied upon byboth the sides,. Thus, the appellant-assessee has now assailedthe impugned order by challenging the same for all theassessment years. DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 8device merely on papers and upheld the penalty. Dissatisfiedwith the sustenance of the said penalty, the matter was carriedin appeal before the ITAT and the ITAT vide impugned order dt.07/10/2011 has upheld the finding of the CIT(A) after analyzingthe evidence on record as also the case laws relied upon byboth the sides,. Thus, the appellant-assessee has now assailedthe impugned order by challenging the same for all theassessment years. 8.Upon perusal of Section 271(1)(c) of the IT, it goes toshow that the penalty can be imposed by the AO or theCommissioner of Appeals or the Commissioner, as the casemay be, if the assessee has concealed the particulars of hisincome or has furnished inaccurate particulars of such income.Therefore, the AO has first to satisfy as to whether theassessee concealed the particulars of income or has furnishedinaccurate particulars of such income. In so far as this fact isconcerned, all the three authorities in unison have come to theconclusion that the intention of the assessee was to evade taxand it would be appropriate to quote the factual finding of ITATwhile sustaining disallowance of depreciation. The ITAT, videorder dt.26/05/2005, while sustaining the disallowance ofdepreciation, specifically came to the conclusion that there wasa colourable device in between two interconnected companies 9 and the findings arrived at by the ITAT is reproduced ad-infra:- “We have heard both the parties at length andgone through the material available on record fromwhich it appears that M/s. Punsumi India Ltd. hastransferred technical know-how to the assessee-company. It does not mean that Punsumi India Ltd.has ceased the technical know-how. It might havealso possessed the same technical know-how sothere is no question to acquire this technical know-how from the company because this technicalknow-how was originated by M/s. Punsumi IndiaLtd. and they were having the monopoly over thetechnical know-how. It was not patented technicalknow-how. In other words, Punsumi India Ltd. washaving that technical know-how so far as thebusiness interest and they have sold it to theassessee and might be to other legal entities. Itwas not sold with the patent rights. In fact, thistechnology was not patented as the same wassimple technology which is very common. Nospecial significance or patent material was eversubmitted or claimed by the assessee. In these-circumstances, it is surprising how and why socalled technology again was taken on royalty basiswhich was earlier sold. This is nothing. This ismerely a paper transaction. In fact, no technical-knowhow was acquired by the assessee in theabsence of the plant and machinery. No resolutionwas passed by the Board of Directors. Nodocument has been executed except theMemorandum of Understanding. This shows thatthere was colourable device. In plant and DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 10 -machinery, the technical knowhow was of no use.It may be mentioned that the assessee has not-fully cooperated with the lower authorities so theyissued the summons under section 131 to theemployees of M/s. Punsumi India Ltd., who werealso looking the interest of both the companies.The brains of both the companies are common. Inthese circumstances, we find no merit in the claimof the assessee.Without repeating, we uphold theorder of the lower authorities, who have rightlydenied depreciation amounting to Rs.1,22,50,341/-for technical know-how. The orders of the lowerauthorities are hereby sustained along with thereasons mentioned therein. “ (Emphasis Supplied) DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 10 -machinery, the technical knowhow was of no use.It may be mentioned that the assessee has not-fully cooperated with the lower authorities so theyissued the summons under section 131 to theemployees of M/s. Punsumi India Ltd., who werealso looking the interest of both the companies.The brains of both the companies are common. Inthese circumstances, we find no merit in the claimof the assessee.Without repeating, we uphold theorder of the lower authorities, who have rightlydenied depreciation amounting to Rs.1,22,50,341/-for technical know-how. The orders of the lowerauthorities are hereby sustained along with thereasons mentioned therein. “ (Emphasis Supplied) 9.The finding of fact arrived at by the ITAT, in quantumproceedings referred to above, attained finality. Now, on theface of it, in the assessment proceedings, the depreciation hasbeen held to be based merely on a paper transaction inbetween the two inter connected parties even when the MOUhaving not been properly acted upon. We need not quote thelanguage of two MOUs entered into by and between theassessee and Punsumi India Ltd. dt. 05/10/1992 and20/04/1993 but in the quantum (regular) proceedings all thethree authorities have elaborately discussed about the salientfeatures of the MOUs and after recording finding of fact came tothe conclusion that the MOUs are merely on papers and the DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 11 entire transaction is sham and colourable one and sustaineddisallowance of depreciation which is based on appreciation ofevidence and concurrent finding of fact not only by the AO butCIT(A) as well as ITAT in the quantum proceedings, but all thethree authorities in unison in the present proceedings haveagain held that the MOUs were merely on papers and had notbeen acted upon. It is also a finding of fact that not a singleamount passed in between both the parties except the bookadjustments which remained on paper only. 10.Once the addition was sustained by the ITAT, primarily theonus shifted on the assessee to prove otherwise. We areconscious of the fact that the penalty is distinct and separateand different conclusion can be reached in the context ofpenalty and the finding reached in quantum proceedings maynot hold good, but then, it was for the appellant-assessee tohave submitted material contrary to which the ITAT placedreliance at the time of passing of the order dt.26/05/2005. Wehave gone through the reasoning of the AO in the penaltyproceedings and the AO observes that the appellant-assesseehave not filed a proper explanation/reply and merely stated togrant further time, it is observed by the AO in this regard asunder:- “A show cause vide notice dated 9-11-2005 has DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 12 been issued and duly been served. The assesseewas required to file its reply by 28-12-2005. Incompliance of above the assessee vide its letterdated 19-12-2005 stating therein that this issue maybe decided after the disposal of rectificationapplication on deletion of addition made by AO onprotective basis in respect of job charges.” “A show cause vide notice dated 9-11-2005 has DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 12 been issued and duly been served. The assesseewas required to file its reply by 28-12-2005. Incompliance of above the assessee vide its letterdated 19-12-2005 stating therein that this issue maybe decided after the disposal of rectificationapplication on deletion of addition made by AO onprotective basis in respect of job charges.” 11.Thus, despite of an adequate opportunity having beengranted to the appellant-assessee by the AO, the appellant-assessee simply wanted to defer the matter knowing fully wellthat the penalty proceedings would get time barred by the endof December, 2005. Therefore, the onus and burden, which layheavily on the appellant-assessee to place adequate material tocontrovert, as penalty being distinct and separate, was notavailed by the appellant-assessee. The burden which shifted onthe assessee was not discharged. Even before the CIT(A) andITAT, no specific point was raised except that the AO is notright in treating the transaction as a measure of tax evasion orthat the conclusion of AO is based on suspicion and surmisesand that the ITAT has also decided the matter on the basis ofsuspicion and surmises. The ITAT, by the impugned order, hassustained the penalty as no new fact or material was brought bythe appellant-assessee even before the ITAT to come to adifferent conclusion. Before the ITAT, one additional fact wasmentioned that “claim was made on account of mistake on the DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 13part of the auditor and because of the mistake of the auditor,the assessee ought not to have been penalized.” However, theassessee has not been able to substantiate its claim as to howthere was a mistake on the part of the auditor and there is noaffidavit or explanation of the auditor that a mistake wascommitted by the auditor in giving an advise in the manner thedepreciation was claimed. The finding of the ITAT is based onfacts that there is no explanation on record to suggest that theclaim of depreciation made by the assessee was bonafide.There is a difference between wrong claim and a false claim. Ifthere is a wrong claim on the basis of a bonafile opinion, thenpenalty perhaps is not imposable. If the claim is debatable asper decision of different appellate authorities, then also penaltyis not leviable. However, if claim is false then penalty isdefinitely leviable. 12.In the impugned order of the ITAT as well as the otherauthorities, in the written submissions and the present appeal,the assessee has harped that even as per AO the claim wasallowable u/s 35AB of the IT Act to the extent allowable @ 1/6[th]for 6 years so as to justify its claim that in any case it wasallowable, we are afraid the assessee has wrongly put in thesaid claim when a passing reference has been made by theAO. The assessee nowhere raised such a plea or claim nor any DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 14 basis was forthcoming on the part of the assessee in any of theexplanation before any of the authorities neither at the time ofregular assessment nor during the penalty proceedings. Theassessee appears to be taking benefit of AO's passingreference in assessment order which reads “without prejudiceto the above, if at all the claim of the assessee is right, then itshould have been claimed u/s 35AB to which 1/6th of the totalcost is allowable for 6 years.”In our view, no claim was beforethe AO but the AO, on his own has observed this fact without atall, any issue or claim on behalf of the assessee and samecannot be said to be view of the AO that it was admitted by theAO and rejected by the ITAT. DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 14 basis was forthcoming on the part of the assessee in any of theexplanation before any of the authorities neither at the time ofregular assessment nor during the penalty proceedings. Theassessee appears to be taking benefit of AO's passingreference in assessment order which reads “without prejudiceto the above, if at all the claim of the assessee is right, then itshould have been claimed u/s 35AB to which 1/6th of the totalcost is allowable for 6 years.”In our view, no claim was beforethe AO but the AO, on his own has observed this fact without atall, any issue or claim on behalf of the assessee and samecannot be said to be view of the AO that it was admitted by theAO and rejected by the ITAT. 13.One more question has been framed that the order ofpenalty passed on 30/12/2005 was beyond 6 months and isbeyond the period of limitation u/s 275(1)(a) as the order ofITAT upholding disallowance of depreciation is dated26/05/2005. We fail to understand the ground raised for the firsttime before us and do not find the said claim having been everraised before any of the three authorities and thus the claimeven otherwise could not have been raised for the first time andthus deserves to be rejected. Even otherwise, penalty can beimposed in six months from the end of the month in which theorder of the Commissioner (Appeals) or as the case may be the DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 15appellate Tribunal is received by the Chief Commissioner orCommissioner which ever period expires later, is reckoned asaforesaid from the time the order is received by the ChiefCommissioner or Commissioner of Income Tax u/s 275(1)(a)and not from the date of the order of the ITAT for the purposesof penalty. 14.So long as the assessee has not concealed any materialfact or the factual information given by him, has not been foundto be incorrect, he will not be liable for imposition of penalty u/s271(1)(c) of the Act even if the claim made by him isunsustainable in law provided that he either substantiates theexplanation offered by him or the explanation is found to bebonafide. If the explanation is neither substantiated nor shownto be bonafide, the explanation u/s 271(1)(c) would come intoplay and the assessee would be liable for the prescribedpenalty. A claim made by the assessee needs to be bonafideand if the claim, besides being incorrect in law, is malafide,explanation 1 to Sec. 271(1) would come into play and work tothe disadvantage of the assessee. We have already observedherein above and the finding of the ITAT, which is a final factfinding authority that the assessee claimed depreciation whichwas never allowable and the assessee was aware of the truenature of the transaction despite which the claim for DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 16depreciation was made. Its claim was rejected by the Tribunal inthe quantum proceedings and that order has attained finality.The explanation given by the assessee for the claim ofdepreciation is neither bonafide nor substantiated. All these areon the basis of appreciation of evidence on record found by thelower authorities and thus, the impugned order is based onappreciation of evidence and has been reached on a finding offact. 15.In view of what we have observed herein above, vis-visthe finding of fact recorded by the ITAT as also the other lowerauthorities, which is based on appreciation of evidence andmaterial on record, not only in the penalty proceedings but alsoin the regular (quantum) proceedings and no question of lawmuch less substantial question of law can be said to arise out ofthe order passed by the ITAT. We do not find any perversity orillegality in the order of the ITAT. 16.Consequently, all the four appeals, being devoid of merits,are hereby dismissed in limine. [J.K. RANKA],J. ,J. Raghu/p.16/ 15.In view of what we have observed herein above, vis-visthe finding of fact recorded by the ITAT as also the other lowerauthorities, which is based on appreciation of evidence andmaterial on record, not only in the penalty proceedings but alsoin the regular (quantum) proceedings and no question of lawmuch less substantial question of law can be said to arise out ofthe order passed by the ITAT. We do not find any perversity orillegality in the order of the ITAT. 16.Consequently, all the four appeals, being devoid of merits,are hereby dismissed in limine. [J.K. RANKA],J. ,J. Raghu/p.16/ Certificate:All corrections made in the judgment/order have been incorporated in thejudgment/order being e-mailed. Raghu, Sr. PA. DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012 DB ITA-104/2012DB ITA-101/2012DB ITA-102/2012DB ITA-103/2012