Rc/74/1997 Of Vinod Bhargava v. The Commissioner Of Income Tax Hyd

THE HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMREFERENCE CASE Nos.153 of 1986 & 74 of 1997COMMONJUDGMENT: (Per LNR,,J) Both these Revision Cases are in relation to sameassessee and same items. Hence, they are disposed of,through the common judgment. The applicant in both the revision cases is an industryinvolved in the manufacture and supply of certain criticaloptical equipments, mostly used in Defence Sector. Itimported an item, by name, Balzars Vacuum Coating Bak 600Machine, from a foreign country, in the year 1987. In thereturns filed for the assessment year 1987-1988, the applicantclaimed 100% depreciation on the imported equipment. TheAssessing Authority disallowed the claim of the applicant,taking the view that the installation itself was at the fag end ofMarch, 1987, and that it cannot be said that the installationwas complete, and since there is no proof of use of themachinery, the question of allowing depreciation does notarise. Apart from disallowing the claim of the applicant, theAssessing Authority levied penalty of Rs.25,88,650/-. The applicant filed two separate appeals before theCommissioner of Income Tax. The Commissioner took theview that there is evidence to show that the installation ofmachine was complete, by the end of the Assessment Year1987-1988, but there is no proof as to usage of the machineryand, accordingly, dismissed both the appeals. The applicantcarried the matter in further appeal numbered as Appeal Nos.896/Hyd/1991 and 1016/Hyd/1995, to the Income TaxAppellate Tribunal, Hyderabad Bench “B” (for short “the Tribunal”). The appeals were dismissed on 29.04.1994and 03.09.1996, respectively. The applicant filed two applications, beingR.A.Nos.346/Hyd/1994 and 813/Hyd/1996 in the appeals,under Section 256(1) of the Income Tax Act (for short ‘theAct”), with a prayer to frame questions and refer the same tothis Court. After hearing both the parties, the AppellateTribunal framed the following questions inI.T.A.No.896/Hyd/1991 and referred the same to this Court foropinion, and it is taken up as R.C.No.153 of 1996: 1)Whether on the facts and circumstances of the case,could it be said that the appellant has used BalzersVacuum Coating Bak 600 Machine for the purpose ofbusiness as understood under Section 32 of theIncome Tax Act and the same while computing theincome for the assessment year 1987-88?could it be said that the appellant has used BalzersVacuum Coating Bak 600 Machine for the purpose ofbusiness as understood under Section 32 of theIncome Tax Act and the same while computing theincome for the assessment year 1987-88? 2)Whether on the facts and circumstances of the case,the Tribunal was correct in holding that even if it isassumed that the machinery was installed on 29[th]March, 1987 as contended by the assessee there is noproof that the said machine was put to use for thepurpose of the business of the assessee on30.03.1987 and 31.03.1987 within the meaning ofSection 32(1) of the Income Tax Act for claimingdepreciation? the Tribunal was correct in holding that even if it isassumed that the machinery was installed on 29[th]March, 1987 as contended by the assessee there is noproof that the said machine was put to use for thepurpose of the business of the assessee on30.03.1987 and 31.03.1987 within the meaning ofSection 32(1) of the Income Tax Act for claimingdepreciation? 3)Whether on the facts and in the circumstances of thecase, the appellant is entitled to allowance ofdepreciation of Rs.49,75,808/- on Balzers VacuumCoating Bak 600 machine while computing its incomefor the assessment year 1987-88?case, the appellant is entitled to allowance ofdepreciation of Rs.49,75,808/- on Balzers VacuumCoating Bak 600 machine while computing its incomefor the assessment year 1987-88? Similarly, in I.T.A.No.1016/Hyd/1996, the following questionswere framed and referred to this Court and it is taken up asR.C.No.74 of 1997: 3)Whether on the facts and in the circumstances of thecase, the appellant is entitled to allowance ofdepreciation of Rs.49,75,808/- on Balzers VacuumCoating Bak 600 machine while computing its incomefor the assessment year 1987-88?case, the appellant is entitled to allowance ofdepreciation of Rs.49,75,808/- on Balzers VacuumCoating Bak 600 machine while computing its incomefor the assessment year 1987-88? Similarly, in I.T.A.No.1016/Hyd/1996, the following questionswere framed and referred to this Court and it is taken up asR.C.No.74 of 1997: 1)Whether on the facts and in the circumstances of thecase, the Tribunal was justified in refusing to admit asadditional evidence the sworn depositions of theAssessing Officer recorded in the prosecutionproceedings in the Court of Special Judge forEconomic Offences, Hyderabad for the purpose ofdeciding the justification of imposition of penalty underSection 271(1)(c) of the Act?case, the Tribunal was justified in refusing to admit asadditional evidence the sworn depositions of theAssessing Officer recorded in the prosecutionproceedings in the Court of Special Judge forEconomic Offences, Hyderabad for the purpose ofdeciding the justification of imposition of penalty underSection 271(1)(c) of the Act? 2)Whether on the facts and in the circumstances of the case and the evidence and material on record, theAppellate Tribunal was justified in holding that theassessee was liable for imposition of penalty underSec.271(1)(c) of the Act for claiming depreciation onits plant and machinery?Appellate Tribunal was justified in holding that theassessee was liable for imposition of penalty underSec.271(1)(c) of the Act for claiming depreciation onits plant and machinery? 3)Whether the appellate tribunal is justified in upholdingthe order of the Appellate Commissioner of IncomeTax confirming the imposition of penalty underSec.271(1)(c) of the Act when the assessee had madebona fide disclosure of all material facts in relation tothe computation of its income as provided inExplanation-I to Section 271(1)(c) of the Income TaxAct, 1961?the order of the Appellate Commissioner of IncomeTax confirming the imposition of penalty underSec.271(1)(c) of the Act when the assessee had madebona fide disclosure of all material facts in relation tothe computation of its income as provided inExplanation-I to Section 271(1)(c) of the Income TaxAct, 1961? Sri Y. Ratnakar, learned counsel for the applicant,submits that the machinery imported by his client was full-fledged in all respects, and except that certain electricalconnections were to be given, there was no major work to beundertaken for installation. He contends that the AppellateAuthority itself took the view that the machinery reachedHyderabad on 28.03.1987 and its installation was completebefore the end of the financial year, and still, depreciation wasdisallowed. He further submits that the requirement, under theprovisions of the Act that allows depreciation, is that themachinery must be capable of being used and, in that view ofthe matter, the depreciation ought to have been allowed. The learned counsel further submits that the investmentupon the imported machinery was huge, and with an intentionto avail the benefit under the Act, at the earliest, the applicantclaimed depreciation in the financial year 1987-88, and if forany reason, the depreciation was impermissible, there was nojustification for imposition of the penalty. He submits thatwhen law confers some benefit in the form of depreciation onan assessee, an attempt made to avail it must not lead topenalization. He further submits that there was no intention onthe part of the applicant to commit fraud, and the very fact thatthe machinery was found to have been installed, would renderthe imposition of penalty untenable. The learned counsel further submits that the investmentupon the imported machinery was huge, and with an intentionto avail the benefit under the Act, at the earliest, the applicantclaimed depreciation in the financial year 1987-88, and if forany reason, the depreciation was impermissible, there was nojustification for imposition of the penalty. He submits thatwhen law confers some benefit in the form of depreciation onan assessee, an attempt made to avail it must not lead topenalization. He further submits that there was no intention onthe part of the applicant to commit fraud, and the very fact thatthe machinery was found to have been installed, would renderthe imposition of penalty untenable. Sri S.R. Ashok, learned Senior Counsel for the IncomeTax Department, submits that depreciation is a facility createdunder the Act, subject to certain conditions, and once itemerged that the applicant did not comply with the conditions,it is not entitled to claim the benefit. Learned Senior Counselfurther submits that mere installation of machinery is notsufficient and what entitles an assessee, to claim depreciation,is the factum of the machinery having been put to use. Hecontends that even what is stated by the applicant cannot betreated as an act of use. As regards the penalty, the learned counsel submits thatonce the claim is found to be untenable, the imposition ofpenalty, under Section 271(1)(c) of the Act, becomes almost amatter of course, and that the questions referred to it deserveto be answered against the applicant. The applicant made an effort to claim depreciation,under Section 32 of the Act, on an item of machinery, importedfrom a foreign country. The law, as it stood at the relevantpoint of time, provides for depreciation to the extent of 100%on the items imported by the applicant. The Deputy Commissioner of Income Tax(Assessments), Special Range-3, Hyderabad, before whomthe returns were filed, entertained a doubt as to the very dateof installation. He has not only undertaken the close scrutinyof the relevant documents, but also has recorded theevidence of various persons connected with the matter. Anorder, running into 31 pages, was passed, discussing variousaspects. The deposition of witnesses, together with thequestions and answers, was incorporated. Ultimately, hepassed an order, dated 29.03.1990, taking the view that theinstallation of machinery itself was not complete by31.03.1987, and accordingly, the depreciation was allowed. He has also imposed the penalty of Rs.25,88,650/-. The Commissioner (Appeals), however, took the viewthat though the installation part of it may have taken place, itwas not effective to the extent of making the machinerycapable of being put to use and that, in fact, the machinerywas not put to use. Therefore, the Appellate Commissionerconfirmed the findings of the Assessing Authority. TheTribunal dismissed the further appeals. On several occasions, the Hon’ble Supreme Courtinterpreted the expression “used for the purposes of thebusiness” that finds place in Section 10 of the Indian IncomeTax Act, 1922. Reference, in this context, may be made toThe Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar[[1]].It was held that not only the machineryor plant must have been installed, but also it must have beenused for the purpose of business, meaning thereby, muchmore than mere trial run. This view was adopted by theKarnataka High Court in Deputy Commissioner of Income Tax Vs. Yellamma Dasappa Hospital[[2]]and the BombayHigh Court in Dineshkumar Gulabchand Agrawal Vs. Commissioner of Income Tax and another[[3]].Viewed fromthat angle, it can be said that though the applicant might haveinstalled the machinery before 31.03.1987, it was not capableof being put to use, much less, it was, in fact, put to use. Therefore, the questions framed in R.C.No.153 of 1996 areanswered against the applicant and in favour of the IncomeTax Department. Income Tax, Bihar[[1]].It was held that not only the machineryor plant must have been installed, but also it must have beenused for the purpose of business, meaning thereby, muchmore than mere trial run. This view was adopted by theKarnataka High Court in Deputy Commissioner of Income Tax Vs. Yellamma Dasappa Hospital[[2]]and the BombayHigh Court in Dineshkumar Gulabchand Agrawal Vs. Commissioner of Income Tax and another[[3]].Viewed fromthat angle, it can be said that though the applicant might haveinstalled the machinery before 31.03.1987, it was not capableof being put to use, much less, it was, in fact, put to use. Therefore, the questions framed in R.C.No.153 of 1996 areanswered against the applicant and in favour of the IncomeTax Department. Now, it remains to be seen, as to how the questions inR.C.No.74 of 1997 need to be answered. Penalty wasimposed upon the applicant, almost as a consequence ofdisallowing depreciation. Section 271 of the Act, no doubt,confers power upon the Income Tax Officer to levy penalty, if itis found that any claim made by the assessee is found to be wrong. Two aspects become relevant here. The suppression ormisstatement, on the part of an assessee, which in turn, isnoticed by the Income Tax Officer in the course of processingthe return on the one hand, and a claim made by theassessee, turning out to be not permissible in law, on the otherhand. On the first aspect, penalty can be imposed, as a matterof course. The reason is that the assessee was not truthful insubmitting the returns. If any information was suppressed bythe assessee and but for the attentiveness of the Income TaxOfficer, it would have escaped taxation, the assessee mustcertainly be dealt with sternly. Where, however, the assesseehonestly files returns by presenting the facts known to him andclaims some benefit in his understanding of the law, the merefact that a different view is possible on some of the claims,must not lead, straight away, to imposition of penalty. Denialof benefit itself would be a phenomenal disadvantage to theassessee. No one can claim that his understanding of a provision oflaw, that too, of a complicated and ever-changing enactmentlike the Income Tax Act, is the ultimate or free from flaw. Eventhe view taken by Courts of law, after so much of hearing anddeliberation, turns out to be incorrect by a superior forum. Agenuine effort made by the applicant to claim depreciation onthe imported machinery, must not result in doubledisadvantage, namely, denial of depreciation and imposition ofpenalty. Things would have been different altogether, in caseany depreciation was claimed, on the machinery that was notimported at all. Therefore, the questions framed in R.C.No.74of 1997 are answered in favour of the assessee and againstthe Income Tax Department. Accordingly, R.C.No.153 of 1996 is dismissed and R.C.No.74 of 1997 is allowed. There shall be no order as tocosts. The miscellaneous petitions filed in the reference casesshall stand disposed of. _____________________ L. NARASIMHA REDDY, J _______________________ CHALLA KODANDA RAM, J 10[th] June, 2014Note: LR copy be marked. (b/o) cbs THE HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.Nos.153 of 1986 & 74 of 1997 cbs 10[th] June, 2014 THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+REFERENCE CASE Nos.153 of 1986 & 74 of 1997% 10-06-2014 Sri Vinod Bhargava, Hyderabad. .. Applicant Vs. $ Commissioner of Income Tax, Hyderabad. .. Respondent <GIST: >HEAD NOTE: ! Counsel for applicant: Sri Y. Ratnakar ^ Counsel for respondent : Sri S.R. Ashok ? CASES REFERRED : CHALLA KODANDA RAM, J 10[th] June, 2014Note: LR copy be marked. (b/o) cbs THE HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.Nos.153 of 1986 & 74 of 1997 cbs 10[th] June, 2014 THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+REFERENCE CASE Nos.153 of 1986 & 74 of 1997% 10-06-2014 Sri Vinod Bhargava, Hyderabad. .. Applicant Vs. $ Commissioner of Income Tax, Hyderabad. .. Respondent <GIST: >HEAD NOTE: ! Counsel for applicant: Sri Y. Ratnakar ^ Counsel for respondent : Sri S.R. Ashok ? CASES REFERRED : 1)ITR Volume XXV, 1954 Page 2652)ITR Volume 290, 2007 Page 3533)ITR Volume 267, 2004 Page 7682)ITR Volume 290, 2007 Page 3533)ITR Volume 267, 2004 Page 768 [1]ITR Volume XXV, 1954 Page 265ITR Volume XXV, 1954 Page 265 [2]ITR Volume 290, 2007 Page 353ITR Volume 290, 2007 Page 353 [3]ITR Volume 267, 2004 Page 768ITR Volume 267, 2004 Page 768