Ita/65/2008 Of The Commissioner Of Income Tax v. M/S.english Inddian Clays

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN TUESDAY, THE 25TH MAY 2010 / 4TH JYAISHTA 1932 ITA.No. 65 of 2008() -------------------- ITA.4/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT:- ---------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT/APPELLANT:- -------------------------------------- ENGLISH INDIAN CLAYS LTD., THIRUVANANTHAPURAM. ADV. SRI.A.KUMAR. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/2/2010, THE COURT ON 25/5/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. = = = = = = = = = = = = = I.T.Appeal No.65 of 2008. = = = = = = = = = = = = =Dated this the 25th day of May, 2010. Gopinathan, J. J U D G M E N T Appeal is by the Revenue under Section 260A of theIncome Tax Act. On 26.11.1996 the respondent-assessee-company filed return admitting income of Rs.34,76,480/- forthe assessment year 1996-'97. The assessee claimed tohave entered into a lease agreement with M/s.PrakashIndustries Ltd., New Delhi whereby Air Pollution ControlEquipment and Flameless Furnaces claimed to have beenpurchased by the assessee from M/s.Pioneer EngineeringCompany, Jamshedpur and M/s.Ashish EngineeringCompany, Durg, Madhyapradesh respectively were leasedout to M/s.Prakash Industries Ltd. In the return, I.T.Appeal No.65 of 2008. -: 2 :- filed declaring income, the assessee claimed 100%depreciation amounting to Rs.3,60,19,500/- as cost of theabove said equipments. The Department conducted searchand enquiry on the genuineness of claim of depreciation.The respondent was also heard and assessment wasfinalised rejecting the claim for 100% depreciationtowards cost of the above said equipments along with certainother claims. 2. The assessee respondent feeling aggrieved preferred appeal before the Commissioner of Income Tax(Appeals), Thiruvananthapuram. The first appellate authority, though allowed the appeal partly, confirmed theassessment order so far as it relates to the denial ofdepreciation of the above said equipments along withcertain other deductions and allowances. 3.The respondent assessee preferred second appealbefore the Income Tax Appellate Tribunal, Kochi. Appellant -: 3 :- herein preferred cross objection so far as the first appellateorder went against it. Before the Appellate Tribunal threegrounds were urged by the respondent. The first groundis relating to the depreciation in respect of the abovementioned equipments. When the appeal came up forhearing, on behalf of the respondent assessee it wassubmitted that the first ground was not pressed, but analternate ground was raised with a contention that inrespect of the lease transaction there was criminalcomplaint before the Chief Metropolitan Magistrate, NewDelhi and that was settled between the respondentassessee and the lessee and that by way of settlement, asum of Rs.1,30,00,000/- was obtained. It was alsosubmitted that the respondent assessee had obtainedsome amount towards rental for the equipments leased. Afteradjusting the rentals along with the amount said to have beenreceived by the respondent assessee by way of settlement of I.T.Appeal No.65 of 2008. -: 4 :- I.T.Appeal No.65 of 2008. -: 4 :- the criminal case, an amount of Rs.1,55,45,447/- wasrequested to be calculated as business loss out of leasetransaction during the relevant assessment year. That is theadditional ground urged. The Appellate Tribunal dismissedthe first ground as not pressed. Additional ground wasconsidered and answered in favour of the assesseerespondent. The other two grounds raised in the appealmemorandum were answered against the respondent onmerits as against which no appeal is filed. Cross objectionfiled by the department was also rejected. The Departmentwas directed to finalise the assessment by counting the abovementioned amount as business loss. Assailing the above ordergranting business loss, the Department has now come up inappeal. 4.The following are the substantial questions of lawraised in the appeal memorandum: 1) Whether, on the facts and in the circumstances ofthe case and also the ground raised before theIncome Tax Appellate Tribunal being not a purethe case and also the ground raised before theIncome Tax Appellate Tribunal being not a pure -: 5 :- question of law but one depending upon variousfacts,factorsandthesamebeingdisputed/disputable, the Tribunal is justified inconsidering the same by itself or on its own withoutremanding the same for being considered by theAssessing Officer on merits in accordance with lawand with jurisdiction? 2) Whether, on the facts and in the circumstances ofthe case and in the light of the findings by theAssessing Officer and Commissioner of Income Tax(Appeals) that the entire lease transaction are bogusand mere paper transactions, in the absence of adefinite contrary finding by Tribunal, the Tribunal isright in law and fact in holding that “But as far asthe assessee company is concerned it has incurred aloss,” the loss has been incurred in the course ofcarrying on of that regular business activity” “it isnot a loss by way of loss of capital assets” and arenot the findings wrong erroneous and against factsand realities?the case and in the light of the findings by theAssessing Officer and Commissioner of Income Tax(Appeals) that the entire lease transaction are bogusand mere paper transactions, in the absence of adefinite contrary finding by Tribunal, the Tribunal isright in law and fact in holding that “But as far asthe assessee company is concerned it has incurred aloss,” the loss has been incurred in the course ofcarrying on of that regular business activity” “it isnot a loss by way of loss of capital assets” and arenot the findings wrong erroneous and against factsand realities? 3) Whether, on the facts and in the circumstances ofthe case the assessee is entitled to claim deductionof the loss in the assessment year 1996-97 and theTribunal is right in law in giving a direction to theofficer to that effect?the case the assessee is entitled to claim deductionof the loss in the assessment year 1996-97 and theTribunal is right in law in giving a direction to theofficer to that effect? 5.The first question of law raised is regarding the error in the procedure adopted by the Appellate Tribunal afterarriving a finding regarding the alleged business loss. The I.T.Appeal No.65 of 2008. -: 6 :- second question of law is the one pertaining to the actualdispute. So, the first question of law arises only if we arrive ata finding in favour of the respondent regarding the secondquestion of law. The third question of law raised is also oneincidental to the second question of law. Hence we areconsidering the second question of law first. 5.The first question of law raised is regarding the error in the procedure adopted by the Appellate Tribunal afterarriving a finding regarding the alleged business loss. The I.T.Appeal No.65 of 2008. -: 6 :- second question of law is the one pertaining to the actualdispute. So, the first question of law arises only if we arrive ata finding in favour of the respondent regarding the secondquestion of law. The third question of law raised is also oneincidental to the second question of law. Hence we areconsidering the second question of law first. 6. Going by the assessment order and the first appellateorder, we find that the assessing officer as well as the firstAppellate Authority considered the claim urged by therespondent threadbare and arrived at a finding against therespondent that the purchase of machinery mentioned earlierand the so called lease arrangement are bogus and therespondent is not entitled to any depreciation as cost of themachineries purchased and leased out to M/s.PrakashIndustries Ltd. The assessing officer had arrived at aconclusion that the deduction was sought on the basis ofpurchase of assets that never existed from an alleged concernthat never existed and transported the non-existing assets -: 7 :- through alleged transporter that never existed. It was alsofound by the assessing officer that the search conducted bythe Department had revealed a huge play of fraud ofmammoth proportion. The Managing Partner of M/s.PioneerEngineering Co., from where Air Pollution Control Equipment wasclaimed to have been purchased categorically stated that the saidfirm had not supplied/sold any equipment to the assessee ortransported the same to the so called lessee. In the first appeal, acontention was raised that the respondent was not given anopportunity to cross examine the Managing Partner.Theappellate authority was good enough to give an opportunity to therespondent to examine the said person. But, later the respondentdeclined to examine him. Therefore, his evidence denying thepurchase of that equipment and transport to the alleged lesseeremains unimpeached and credible to arrive a safe conclusionthat there was no lease transaction. It was also revealed thatM/s.Ashish Engineering Co., from where flamelessfurnaces were said to have been purchased for letting out I.T.Appeal No.65 of 2008. -: 8 :- to the lessee never existed. The first appellate authority hadconsidered the entire materials on record by a detailed orderin lucid style concurred with the assessing officer. Theconclusion arrived is that there was neither any purchase ofthe above mentioned equipments nor any lease transaction. Itis in the above circumstance, the claim for 100% depreciationwas disallowed by the assessing authority as well as the firstappellate authority. Though the above concurrent finding wasassailed in the second appeal, the respondent didn't pursuethe ground raised in the appeal memorandum assailing thesaid finding. The result is that the said finding that there wasno lease transaction had become final. 7.Going by the order impugned and the additionalground urged by the respondent, we find that the additionalground urged is only an attempt to make it appear that thebogus transaction had taken place and to avoid payment of taxin the form of a claim of business loss which the appellatetribunal found as a complementary issue to the main issue of -: 9 :- 100% depreciation and answered in favour of the respondentwith an observation that no enquiry regarding the facts arecalled for to adjudicate the additional grounds. 7.Going by the order impugned and the additionalground urged by the respondent, we find that the additionalground urged is only an attempt to make it appear that thebogus transaction had taken place and to avoid payment of taxin the form of a claim of business loss which the appellatetribunal found as a complementary issue to the main issue of -: 9 :- 100% depreciation and answered in favour of the respondentwith an observation that no enquiry regarding the facts arecalled for to adjudicate the additional grounds. 8.The learned Senior Counsel on behalf of theappellant would argue that since the assessing officer as wellas the first appellate authority had found that the story ofpurchase of the equipments mentioned earlier and transportof the same to the lessee and the lease transactions werefound bogus, the respondent is not entitled to claim anydeduction as business loss. There cannot be any loss on atransaction that never occurred, so submitted. On the otherhand, Adv.Shri.A.Kumar, the learned counsel appearing forthe respondent submitted that whatever may be the finding ofthe assessing officer as well as the first appellate authority, atransaction occurred whereby the respondent spent a sum ofRs.3,60,19,500/- and on realizing that it was a case ofdeception, forgery, falsification of account etc., the respondentpreferred a complaint before the Chief Metropolitan I.T.Appeal No.65 of 2008. -: 10 :- Magistrate, New Delhi which was first forwarded to theStation House Officer, Hauz Khas Police Station and then onfinding that the offences alleged occurred within the territoriallimits of Sarojini Nagar Police Station, the complaint wasforwarded to the Sarojini Nagar Police Station, New Delhiunder Sec.156(3) of the Criminal Procedure Code and later thematter was settled between the respondent and the accusedand an agreement of settlement was executed and inpursuance of the settlement agreement the respondentreceived a sum of Rs.1,30,00,000/- and the complaint waswithdrawn. According to the learned counsel, all relevantdocuments were produced before the appellate tribunal andbasing upon the documents produced the additional groundwas urged and that after adjusting the amount so received inpursuance to the settlement agreement as well as the amountreceived towards the rentals, there was loss amounting toRs.1,55,45,447/- and that the appellate tribunal was perfectlyjustified in computing that amount as the business loss. -: 11 :- 9.As we mentioned earlier, the assessing officer aswell as the first appellate authority had arrived at a findingthat the purchase of equipments and the lease alleged arebogus. It is a finding on facts based upon the documentsproduced. Since the appeal as far as it assailed the saidfinding was not pressed and the appeal to that extent wasdismissed, that finding had become final. In the abovecircumstance, as argued by the Sr.Counsel appearing for theappellant, there is no business of lease transaction. Sincethere is no business of lease transaction there cannot be anyloss on such business. The respondent having decided not topress ground No.1 pertaining to lease transaction, asmentioned above, finding of the assessing officer concurred bythe appellate authority had become final and would operate asresjudicata as against plea of business of lease and any lossthereon. Though certain documents were seen produced bythe assessee before the appellate tribunal and the appellatetribunal in para.24 of its order mentioned about some I.T.Appeal No.65 of 2008. -: 12 :- I.T.Appeal No.65 of 2008. -: 12 :- documents, there is no specific finding that any of thedocuments produced are either legally valid documents or thatany such documents would establish a lease transactionbetween the assessee and the so called lessee. Neither isthere any finding that the finding of the assessing officer orthe appellate authority that the alleged lease transaction isbogus is unsustainable or that there was any lease transactionestablished. Without basing any document, the appellatetribunal accepted the assessee's version that there is loss outof lease transaction and allowed the appeal in the mannerstated earlier. That finding without the support of anydocument is illegal and unsustainable. 10.Before us 16 documents (Annexures R1 to R16)along with a counter-affidavit were filed. Of these, AnnexuresR1 to R5 were concurrently rejected by the authorities belowand no argument was advanced touching those documents.Many of the documents produced are not legible here andthere. Some are even incomplete. So, those documents are -: 13 :- not entertainable in this third appeal. However, we havecarefully gone through Annexures R6 to R15. It is seen thatAnnexure R6 complaint was filed on behalf of the respondentagainst one S.R.Jain and four others alleging offences underSec.120B, 409, 468, 470, 471 and 473 IPC and the saidcomplaint now stands referred to Station House Officer,Sarojini Nagar Police Station, New Delhi and it is underinvestigation. It appears that the respondent made an attemptto issue process against the accused in the complaint duringthe investigation stage and that was rightly turned down bythe learned Magistrate. What was the motive in applying forissuing process during investigation stage is not revealed.From Annexure R13 it appears that an application underSec.257 of the Crl.P.C. was filed, but the copy of the petitionwas not seen produced. The case number is also notmentioned. Only copy of the docket is produced. So, we areat dark as to under what circumstance the said petition wasfiled and what was the prayer. According to the learned I.T.Appeal No.65 of 2008. -: 14 :- counsel for the respondent, the said application was filed inpursuance to the settlement agreement produced as AnnexureR14. Going by Annexure R14 it is seen the same was draftedas a settlement between the respondent and M/s.PrakashIndustries Ltd. In that settlement agreement there is an offerthat M/s.Prakash Industries Ltd., would pay Rs.1,30,00,000/-.The mode of payment and whether the payment was made ornot is not disclosed. However, there is no proof of payment.Who signed the agreement on behalf of M/s.Prakash IndustriesLtd., and the respondent is not at all disclosed. Annexure R14even does not disclose as to whether the so called settlementwas between respondent or any of the accused. 11.According to the learned counsel, it is in pursuanceof Annexure R14, the complaint was sought to be withdrawnand it was allowed by the court. For two reasons we find thatno reliance can be given to Annexure R14 or to the so calledorder granting permission to withdraw the complaint. Thefirst reason is that once a complaint is forwarded to the police -: 15 :- 11.According to the learned counsel, it is in pursuanceof Annexure R14, the complaint was sought to be withdrawnand it was allowed by the court. For two reasons we find thatno reliance can be given to Annexure R14 or to the so calledorder granting permission to withdraw the complaint. Thefirst reason is that once a complaint is forwarded to the police -: 15 :- station under Sec.156(3) of the Crl.P.C., no complaint wouldbe pending before the Magistrate so as to enable thecomplainant to withdraw the same. Other thing is that, exceptoffence under Sec.420 IPC, the other offences alleged are non-compoundable and the allegations in the complaint are of verygrave in nature and is triable under Chapter XIX of the Codeof Criminal Procedure. Once a case is registered by the policeand investigation started, no court has got any authority tointerfere with the investigation either by an order withdrawingthe complaint or otherwise. Withdrawal of complaint underSec.257 Crl.PC is permissible only in respect of offencestriable under Chapter XX of the Crl.PC., if the allegation istrue, the offences alleged being triable under Chapter XIX, thecomplaint is not liable to be withdrawn under Sec.257 Crl.PC.So, the contention of the respondent that the payment wasmade by the alleged accused in pursuance of a settlementagreement and withdrawing the complaint are not at allconvincing and not legally entertainable. It appears that the -: 16 :- so called complaint and the settlement thereon etc. are onlyfurther attempts made by the respondent to create documentsto make it appear that a transaction which was found bogus bythe assessing officer as well as the first appellate authorityand confirmed in second appeal had occurred. It is also verypertinent to note that the appellate tribunal without going tothe merits or admissibility of the documents in support of theadditional ground urged in the appeal arrived a conclusionthat because of the so called payment the plea of therespondent that there was business loss is admissible. In fact,there is no proof of any payment. We find that the appellatetribunal had gone wrong in finding that there occurred abusiness loss out of a business transaction which had neveroccurred. The documents produced as well as the plea ofpayment of Rs.1,30,00,000/- are also sham and the story thatthere was settlement and consequent payment are allconcocted. 12.Going by Annexure R6 complaint we find that there -: 17 :- is no mention about the equipments said to have been leased.However, it is pleaded that ensuring payment of the rental,cheques for Rs.7,47,405/- were delivered. In Annexure R14,there is mention that civil cases as well as prosecutions underSec.138 of the Negotiable Instruments Acts were filed. Nocase number is mentioned. No copy of the plaint andcomplaint is produced. Neither any copy of compromisepetition filed in those cases nor order thereon is produced.The courts before which those cases were filed is also notrevealed out. Everything appears to be mystery. If the storyput forward by the respondent is true, the respondent has avery good case and in the normal course, it wouldn't be settledfor half amount, that too without actual payment and onpromise of payment. When all these matters are takentogether we find it not convincing. We are constrained toreject the documents now produced to support the plea ofbusiness loss. 13.In support of the plea that the claim towards -: 18 :- 13.In support of the plea that the claim towards -: 18 :- business loss is permissible even if it is found that the businessalleged is illegal or that parties to the business had played anyfraud, the learned counsel relied upon the decisions reportedin George Maijo & Co. vs. Commissioner of Income Tax[(2003) 261 ITR 231]; Commissioner of Income Tax vs.Mahendra N.Shah [(2006) 280 ITR 462] and T.A.Quereshi(Dr.) vs. Commissioner of Income Tax [(2007) 2 SCC 759].Going by the above judgments we find that the set of facts hasno application to the case on hand. In George Maijo's case,the assessee had imported goods. The seller had reportedthat the goods were sent through ship which was reportedlysank. CBI enquiry revealed that the contracted goods werenot put on Board. However, money was paid by the bank tothe foreign seller. It was a case wherein the seller playedfraud on the assessee. In Mahendra's case a false shippingdocument was created and money was collected. InT.A.Quereshi's case the assessee had manufactured heroinillegally and the heroin was seized by the authorities and thus -: 19 :- loss was sustained to the assessee. Here, in this case there isno such transaction, but, the assessee had made documents asif equipments were purchased and lease transactions hadtaken place and payments were made. All documents wererejected by all authorities below. So, the dictum laid down inthose cases cannot be applied to the facts of this case. 14.To conclude, the claim of business loss is not at allentertainable in view of the fact that the finding of theassessing officer as well as the first appellate authority thatthe lease transaction alleged based upon which the 100%depreciation was claimed is a bogus one. We concur with thefirst appellate authority and find that no lease transaction inrespect of the equipments mentioned earlier had taken placein between the respondent and M/s.Prakash Industries Ltd., asalleged by the respondent. So, there cannot be any businessloss on account of that business and no deduction on businessloss is legally permissible. 15.The finding of the Tribunal below that the I.T.Appeal No.65 of 2008. -: 20 :- respondent is entitled to deduction for business loss isperverse and contrary to the materials available on record.The additional documents produced before the Tribunal aswell as before this Court are not better than the documentsproduced before the assessing officer and rejected by him,which was confirmed by the first appellate authority. Theadditional documents produced and additional ground raisedare continued attempts to establish the bogus transaction anddeserves no better consideration other than that was given bythe assessing officer and the first appellate authority inrespect of the lease transaction. These are experimentalattempts to evade tax. The respondent is not entitled to anydeduction towards the business loss as found by the appellatetribunal. Question of law No.2 is answered in favour of theappellant. In view of our finding on question of law No.2, theother two do not arise for consideration. In the result, the appeal succeeds. We set aside theorder of the appellate tribunal and restore that of the first I.T.Appeal No.65 of 2008. -: 21 :- appellate authority to the extent to which the appeal is filed.There will be no order as to costs. C.N.RAMACHANDRAN NAIR (Judge) P.S.GOPINATHAN (Judge) kvs/-