M/S.magna Credit & Financial Services Limiteda v. The Deputy Commissioner Of Income-Tax,Company Circle Iv (3),Chennai - 600 006

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 20.09.2018CORAMTHE HON'BLE MR.JUSTICE T.S.SIVAGNANAM&THE HON'BLE MRS.JUSTICE V.BHAVANI SUBBAROYAN T.C.(A)No.1522 of 2007 M/s.Magna Credit & Financial Services LimitedA-4/4, Krishna 2nd Main Road,G.O.C.H.Colony,Chennai - 600 090. ... Appellant / Appellant Vs. The Deputy Commissioner of Income-tax,Company Circle IV (3),Chennai - 600 006. ... Respondent / Respondent Tax Case Appeal has been filed under Section 260A of the Income Tax Act, 1961, to frame theSubstantial Question of Law and to answer the same in favour of the appellant with costs. For Appellant : M/s.Sree Lakshmi ValliFor Respondent : Mr.Karthik Ranganathan JUDGMENT V.BHAVANI SUBBAROYAN, J. The present tax appeal is filed against the order passed by the Income Tax Appellate Tribunal, Bench"B", Chennai, in I.T.A.NO.642/Mds/2002 for the assessment year 1996-1997.2. This appeal has been admitted on the following substantial question �whether on the facts and inthe circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming thelevy of penalty of Rs.5,31,800/- under Section 271(i)(c) of the Income tax Act?� 3. The appellant claims to be a company registered under the Companies Act, 1956. They claim thatthey were the owners of Air Pollution Controller 2 Nos, Solid waste controller and Waste heatrecovery which are stated to have been purchased from New Shorrock Mills (a division ofM/s.Mafatlal Industries Limited) and they entered into a lease transaction with the said M/s.MafatlalIndustries Limited by lease agreement dated 25.03.1996, by which, the above mentioned assetswere leased out for a period of 3 years to M/s.Mafatlal Industries limited. The company had claimed100% depreciation on machinery worth Rs. 25,00,000/-. The depreciation claimed by the companybeing Rs.12,50,000/- each for assessment year 1996-1997 and 1997-1998. There were certainirregularities found by the Revenue with regard to the lease of machinery by the appellant. TheAssessing Officer by its assessment order for the assessment year 1996-1997, has disallowed thesaid claim of depreciation, and assessment was completed under Section 143(3) of the Income TaxAct. Independently, penalty proceedings under Section 271(i)(c) was initiated. As against theassessment order, the assessee preferred appeal before the Commissioner of Income Tax (Appeals)[CIT (A)], who by order dated 21.05.2000, deleted certain additions, but did not consider the issue of dis-allowance of depreciation. The assessee filed petition under Section 154 of the Act to rectify theerror in the order, which was rejected by order dated 13.02.2001, confirming the dis-allowance of100% depreciation. 4. The show cause notice issued as to why penalty under Section 271(1)(c) should not be imposedwas adjudicated and the Assistant Commissioner Income Tax,by its order dated 31.07.2001, heldthat it is a fit case to levy penalty under Section 271(i)(c) of the Act on the appellant company forconcealment of income, thereby, levied a sum of Rs.5,31,800/- as penalty under Section 271(i)(c) ofthe Income Tax Act. The appellant preferred an appeal before the Commissioner of Income Tax(Appeal - V), who in turn by its order dated 20.02.2002, confirmed the order passed by the AssistantCommissioner Income Tax. 5. As against which, the appellant moved the Income Tax Appellate Tribunal in I.T.A.No.642/MDS/2002. The Income Tax Appellate Tribunal upheld the levy of penalty as there wasno satisfactory explanation given by the assessee/appellant herein for the said lease transaction tobe a bonafide transaction, as against which, the present tax appeal has been filed. 5. As against which, the appellant moved the Income Tax Appellate Tribunal in I.T.A.No.642/MDS/2002. The Income Tax Appellate Tribunal upheld the levy of penalty as there wasno satisfactory explanation given by the assessee/appellant herein for the said lease transaction tobe a bonafide transaction, as against which, the present tax appeal has been filed. 6. The learned counsel for the appellant submitted that the Tribunal has failed to appreciate thegenuineness of the sale and lease back transactions which was substantiated by supportingdocuments and invoices. It was also further contended by the appellant that the lease denials havebeen exceeded to tax as revenue receipts and in the hands of the lessee. The sale of assets has beenreduced from the WDV of the respective blocks of assets and lease rental paid by the appellant hasbeen allowed as revenue deductions. In this context, the appellant bonafidely believed that thetransaction was a genuine one. Further, it was contended that merely on suspicion and surmises, thedepreciation cannot be denied. Even otherwise, the depreciation claimed under transaction even if itis disallowed, does not warrant levy of penalty. 7. The learned counsel appearing for the appellant, in support of her contention, has relied on thecase reported in (2013) 359 ITR 0565 (Karnataka), Commissioner of Income Tax and Others Vs.Manjunadha Cotton and Gining factory, for the proposition penalty proceedings under Section271(i)(c) of Income Tax Act, - existence of such condition should be discernible from the AssessmentOrder or Order of the Appellate or Revisional Authority and whether it is for concealment of Incomeof furnishing of incorrect particulars of income. 8. The learned counsel also relied upon the Judgment reported in 1980 AIR 1149 in the case ofAnantharam Veerasingaiah and Company Vs. Commissioner of Income Tax, Andhra Pradesh,wherein, it has been observed as follows:- "But while considering the legal principles involved in the application of Section 271(i)(c) the HighCourt, in our opinion, has erred in entering into the facts of the case and determining in point of factthat the assessee earned income during the relevant previous years and that he was guilty ofconcealing such income or furnishing inaccurate particulars of it. Having found that the legal basisunderlying the order of the Appellate Tribunal was not sustainable, the High Court should havelimited itself to answering the question raised by the reference in the negative, leaving it to theAppellate Tribunal to take up the appeal again and redetermine it in the light of the law laid down bythe High Court. It is the Appellate Tribunal which has been entrusted with the authority to find facts.A High Court is confined to deciding the question of law referred to it on facts found by theAppellate Tribunal. That is the kind of order we now proposed to take". 9. With regard to the power of High Court in limiting itself in deciding the question of law referredto it on facts found by the Appellate Tribunal, the Appellant relied on the Judgment reported in AIR2008 Supreme Court 1541, in the case of Thiruvengada Pillai Vs. Navaneethammal and Another, for the proposition execution of documentary instrument written on stamp paper purchased by the sameperson on different dates is not invalid. 10. The learned counsel for the appellant, to substantiate her contention, has relied upon theJudgment reported in (2012) to 348 ITR 0574, in the case of Commissioner of Income Tax Vs. HighEnergy Batteries India limited, wherein, it has been held thus:- 9. With regard to the power of High Court in limiting itself in deciding the question of law referredto it on facts found by the Appellate Tribunal, the Appellant relied on the Judgment reported in AIR2008 Supreme Court 1541, in the case of Thiruvengada Pillai Vs. Navaneethammal and Another, for the proposition execution of documentary instrument written on stamp paper purchased by the sameperson on different dates is not invalid. 10. The learned counsel for the appellant, to substantiate her contention, has relied upon theJudgment reported in (2012) to 348 ITR 0574, in the case of Commissioner of Income Tax Vs. HighEnergy Batteries India limited, wherein, it has been held thus:- 12......"in the absence of any material to pronounce on genuineness of transaction, the mere fact thatwhat has been purchased has been leased out to the vendor or that vendor had undertaken to paythe hire charges, cannot lead to the conclusion that the transaction is a sham one. It could be seenthat the law recognises constructive delivery as an acceptable mode of delivery and possession. Thefact that the assessee had not taken physical possession, per se, does not pronounce anythingagainst the sale that took place between the assessee and the other M/s.Ponni Sugars and ChemicalLimited. Thus, there are no material on record to show that the sale between the assessee andM/s.Ponni Sugars and Chemical Limited was a sham transaction. In the above circumstances, thegenuineness of the said transaction cannot be questioned at all�. 11. The learned counsel appearing for the Income Tax Department, vehemently contends that thesale cum lease back transaction referred by the appellant is nothing but simple financial transactionand it is a tailor made to suit the occasion for concealment of transaction, thereby, to claimdepreciation. 12. The learned counsel would also argue that the quantum assessment cannot be challenged duringthe penalty proceedings. Further, the appellant seems to have filed certain documents regardinglease transaction and in which, most of them were found to be created only for the purpose of givinga colour of lease to a simple financial transaction. 13. Furthermore, the learned counsel for the Department, urged upon this Court that Section271(1)(c) of the Act, clearly provides for penalty that too when there is concealment categoricallyfound, based on which, the assessment order was passed, including the penalty, and the concurrentconfirmation of the penalty by the authorities cannot be interfered. 14. The learned counsel for the Department would rely upon the Judgment, reported in [2014] 49taxmann.com 129 (Karnataka), in the case of Commissioner of Income Tax Vs. BPL Sanyo FinanceLimited, to substantiate that penalty under Section 271(1)(c) of the Income Tax Act, was legallysustainable for furnishing inaccurate particulars on concealment of Income. It was also furtherstated that by virtue of notice under Section 271(1)(c) of the Act, was put to notice that if theassessee does not prove in the circumstances stated in the explanation, that is failure to return hiscurrent income, was not due to fraud or neglect, he shall be deemed to have concealed theparticulars of his income or furnished inaccurate particulars thereof and consequently, be liable topenalty provided by that Section. 14. The learned counsel for the Department would rely upon the Judgment, reported in [2014] 49taxmann.com 129 (Karnataka), in the case of Commissioner of Income Tax Vs. BPL Sanyo FinanceLimited, to substantiate that penalty under Section 271(1)(c) of the Income Tax Act, was legallysustainable for furnishing inaccurate particulars on concealment of Income. It was also furtherstated that by virtue of notice under Section 271(1)(c) of the Act, was put to notice that if theassessee does not prove in the circumstances stated in the explanation, that is failure to return hiscurrent income, was not due to fraud or neglect, he shall be deemed to have concealed theparticulars of his income or furnished inaccurate particulars thereof and consequently, be liable topenalty provided by that Section. 15. The learned counsel for the Department, to substantiate his claim, would also rely upon theJudgment reported in [2014] 42 taxmann.com 491 (Delhi), in the case of Commissioner of IncomeTax, Delhi - IV Vs. Goyal M.G.Gases Private Limited, where imposition of penalty for concealment ofIncome was justified under Section 271(1)(c) of the Income Tax Act, read with Section 13(2) of theIncome Tax Act, 1961. It is submitted that the consequence would be that the persons who makeclaims of this nature actuated by a malafide intention to evade tax otherwise payable by them wouldget away without paying the tax legally payable by them, if their cases are not picked up forscrutiny. This would take away the deterrent effect, which these penalty provisions in the Act haveand the penalty was restored. 16. The learned counsel for the respondent would further place reliance on the Judgment reported in[2015] 63 taxmann.com 244 (Madras), in the case of Indus Finance Corporation Limited Vs.Commissioner of Income Tax, Chennai, to substantiate that it is well within the assessee's knowledgethat the income from the lease was to be treated as income from finance transaction in respect ofsame party. The new plea taken by the appellant that consequent to disallowance of depreciation,the income should also be deleted, has no legs to stand, and the claim was not accepted and heldthat plea taken by the said appellant that consequent to disallowance of depreciation, the incomeshould also be deleted has no legs to stand. 17. The learned counsel for the respondent also relied on the Judgment, reported in [2018] 93taxmann.com 250 (Madras), in the case of Sundram Finance Limited Vs. Assistant Commissioner ofIncome Tax, Co. Circle VI(4), Chennai, wherein, it has been observed that the authoritiesconcurrently rejected the explanation offered by the assessee that the Court was in agreement withthe factual findings rendered by the authorities since the petitioner is a leasing company as it is veryhard to believe a case when the leasing company had made advances for leasing out a machinery,which was never in existence. That apart, the assessee therein had not mentioned either before thelower authorities or before this Court, as to what action they had initiated against the lessee, who isalleged to have committed fraud. That the entire issue would not have come to light but for thesearch conducted in the case of Pioneering Engineering Company and when the assessee wasconfronted with the findings, they have voluntarily reversed the depreciation claimed by them. Thus,the Court has observed that the Tribunal has rightly held that the assessee was liable for penalty. 18. Heard the learned counsel for the appellant and the learned counsel for the respondent, andperused the materials available on record. 18. Heard the learned counsel for the appellant and the learned counsel for the respondent, andperused the materials available on record. 19. On careful perusal of the documents, it is not in dispute that the assets claimed to have beenleased to the said Mafatlal Industries limited, were an integral part of the appellant's factory atGujarat. The Appellate Authority while confirming the order passed by the Assessing Authority, hasheld that the machineries being incapable of commercial purchase and sale in the open market,already being an integral part of the factory of the vendor - lessee, and further held that theassessee had earlier also indulged in similar bogus sale and lease back transaction withA.T.V.Projects India Limited, Bombay in 1993 and had subsequently availed of VDIS in 1997, bywithdrawing this depreciation. This suggests that the assessees is aware of such mechanism ofclaiming false depreciation and thus, concealing the income. The judgments referred to by theRevenue in the cases of Indus Finance Corporation Limited Vs. Commissioner of Income Tax,Chennai, reported in [2015] 63 Taxmann.com 244 (Madras), Commissioner of Income Tax, Delhi - IVVs. Goyal M.G.Gases Private Limited, reported in [2014] 42 taxmann.com 491 (Delhi) andCommissioner of Income Tax Vs. BPL Sanyo Finance Limited, reported in [2014] 49 taxmann.com129 (Karnataka) would fully support the case of the Revenue. 20. On appreciating the factual position, it is seen from the records that the transaction referred bythe appellant claiming 100% depreciation on lease back transaction, enabling the appellant to claim100% depreciation on the assets referred in the lease agreement. It could be seen that the 4 itemsreferred in the lease agreement, cannot be detached as they are part of the bigger system ofmachinery being used by New Sharrock Mills, wherein, the Assessing Authority, based on thevaluers report, had come to the conclusion that the asset is considered integral part of the factory asa whole, which makes it very clear that the assets mentioned in the lease are permanently fixed asan integral part of the factory which cannot be used by anyone else other than New Sharrock Mills.This would lead to the conclusion that the assets are not capable of being sold and sale exists onlyon paper and not in the real sense. 21. The Income Tax Appellate Tribunal, while confirming the orders of the 1st Appellate Authority,has given categorical finding on the concealment of Income, thereby, attracting penalty underSection 271(1)(c) of the Income Tax Act, 1961. 22. On a careful perusal of the entire circumstances, leads to the only conclusion that the AssessingOfficer, Appellate Authority, and the Appellate Tribunal, has rightly rejected the claim of theappellant. In terms of 271(1)(c) of the Income Tax Act, 1961, it empowers the Income Tax Authority,to levy penalty under the Act, if the Assessing Officer or Commissioner of Appeal, or the PrincipleCommissioner during the proceedings, is satisfied that the Assessee has concealed the particulars ofIncome or furnished inaccurate particulars of income. The Assessing Officer, has directed theassessee to pay by way of penalty, a sum which shall not be less than, but, which shall not exceed 3times of amount of tax sought to be evaded by reason of concealment of particulars of income orfurnished inaccurate particulars of income. 23. In this regard, the reliance placed by the appellant's counsel, on the decisions referred abovehave not come in the way to assist the appellant's case. The set of facts in the cases relied by theappellant, is totally different and distinguishable with the case on hand. That apart, it is clear fromthe documents available and the discussion made by the 1st Appellate Authority as well as theAppellate Tribunal that the said sale cum lease back transaction is to conceal a simple financialtransaction, the documents produced by the appellant did not substantiate the claim made by theappellant in any justifiable manner claiming 100% depreciation. There is no proper justificationplaced by the appellant for us to consider or to disbelieve the transaction would not lead to apresumption of concealment of Income or suppression of fact, which is squarely covered underSection 271(1)(c) of the Income Tax Act, empowering the Assessing Authority to levy penalty. 24.In Goyal M.G.Gases (P) Ltd., (supra), the Assessing Officer disallowed depreciation on computerspurchased by the assessee and leased back to another company and both companies being under thesame Management. The CIT (A) confirmed the order as well as the Tribunal and the challenge to thesaid order before the High Court was rejected. Meanwhile, the Assessing Officer imposed penalty forunderstatement of income on sale of cylinders and for bogus claim of depreciation on computers.This order of penalty was confirmed by the CIT (A) and partially confirmed by the Tribunal and thematter was remanded permitting the assessee to cross examine certain persons. On denovaconsideration, the Assessing Officer imposed penalty for furnishing inaccurate particulars of incomein terms of Section 271(1)(c) of the Income Tax Act. The CIT(A) cancelled the penalty imposed by theAssessing Officer which was upheld by the Tribunal and the said order was challenged before theHigh Court. The Court after considering the factual aspects held that it is difficult to believe that theassessee would have known true nature of the transaction and that it was of the bonafide view that itactually �owned� and �leased� computers on which it claimed depreciation. It was further held thateven though the assessee might have furnished all particulars for a tripartite transaction, the factthat what it put up in its return was a sham and mere paper transaction leading to the inevitableconclusion that the explanation of the assessee on the question of its ownership and use of thecomputers is unsubstantiated and malafide. Accordingly, the order passed by the Assessee Officerwas restored. 25.The Assessing Officer while imposing the order of penalty pointed out that on a holisticexamination of the transaction, it is apparent that it is not in the nature of a normal sale and leaseback transaction, rather a hurriedly planned act towards the end of the financial year to claim 100%depreciation benefit and in that process, the Assessee has prepared extensive documentation andthe documents, by themselves, do not mean much unless they are vouched by authentic transaction.After examining the nature of transaction, the Assessing Officer held that the claim for depreciationis fraudulent. On appeal before the CIT(A), the factual details were pointed out as examined by the 25.The Assessing Officer while imposing the order of penalty pointed out that on a holisticexamination of the transaction, it is apparent that it is not in the nature of a normal sale and leaseback transaction, rather a hurriedly planned act towards the end of the financial year to claim 100%depreciation benefit and in that process, the Assessee has prepared extensive documentation andthe documents, by themselves, do not mean much unless they are vouched by authentic transaction.After examining the nature of transaction, the Assessing Officer held that the claim for depreciationis fraudulent. On appeal before the CIT(A), the factual details were pointed out as examined by the Assessing Officer with regard to certificate of installation and valuation report and fire insurancepolicy wherein, it was stated that the certificate of installation was obtained from the employee andtherefore, it is not an independent evidence. Further, the valuation report has not considered theencumbrance on the assets. Further, the insurance policy also revealed several defects. Afterreferring to the decisions, the CIT (A) confirmed the order passed by the Assessing Officer. Beforethe Tribunal, the assessee pointed out that the lease denials have been executed to exceed to tax asrevenue receipts. In the hands of the lessee, the sale of the asset has been reduced from the writtendown value of the respective blocks of assets and the lease rental paid by them has been allowed asrevenue deduction. The Tribunal examined the factual position and pointed out that the so calledassets were part of integral factory owned by the sister concern of the lessee, Mafatlal IndustriesLtd., namely New Shorrock Mills. The Tribunal referred to the valuation report and pointed out thatwhen the assets were part of an integral factory they could not have been sold out to the assesseeand leased out to different concern. Further, the Tribunal pointed out that it is not clear whetherMafatlal Industries Ltd., already borrowed certain monies against the assets because in thevaluation report, the Assessing Officer has stated that the valuer has not been able to verify whetherany encumbrances were made by way of mortgage hypothecation etc., to the bank or any financialinstitution. Further, the assessee could not explain as to why they were not in possession of theoriginal insurance policy and why only copy was obtained from Mumbai. The discrepancy in the dateof stamp paper was also pointed out. Thus, in our considered view three authorities haveconcurrently held on facts against the assessee. While examining the correctness of the order passedby the Tribunal under Section 260A of the Act, we cannot convert ourselves as a third appellateauthority over the findings rendered by the Assessing Officer. 26. Under these circumstances, we find no merits to interfere in the order passed by the Income TaxAppellate Tribunal, confirming the order passed by the 1st Appellate Authority, based on theassessment order for the year 1996-1997 on the appellant's company. The questions of law isanswered against the appellant and in favour of the Department. Accordingly, the appeal standsdismissed. No costs. (T.S.S.J) (V.B.S.J) 20.09.2018 raja/pbn Internet : yes/no Speaking Order/Non-Speaking Order Index : yes/no To The Deputy Commissioner of Income-tax,Company Circle IV (3),Chennai - 600 006. T.S.SIVAGNANAM.J., andV.BHAVANI SUBBAROYAN.J., raja/pbn Pre-delivery Judgment inT.C.(A)No.1522 of 2007