Punishment under Section 271(1)(c) is not applicable to legitimately false depreciation claims

Fact and issue of the case

The assessee did not prefer any appeal against the aforesaid order.

In the penalty proceedings, the assessee was asked to show cause as to why penalty be not imposed u/s 271(1)(c) of the Act, for furnishing of inaccurate particulars of income. The assessee maintained the stand taken during the assessment proceedings. With regard to the issue of addition on account of wrong claim of depreciation of Rs. 15,31,989/-, the assessee stated that the assets had been received in advance, whereas the bills were received later. This, however, could not be substantiated by producing any evidence regarding receipt of machinery. It could also not be proved that the machinery had been put to use in September, 2011. The AO was, thus, of the view, that the assessee had failed to produce any concrete evidence or explanation and it had, therefore, failed to discharge its onus.

Concerning the second issue of disallowance of depreciation amounting to Rs. 2,09,559/-, in the reply to the show cause notice, the assessee merely stated that the purchase bills had been misplaced. The AO observed that such contention of the assessee could not be accepted, since if the bills had been misplaced, the assessee could have got another copy of the bills from the vendor, or, at least, it could have submitted details of the parties /vendors from whom it had purchased the machinery on which the depreciation had been claimed; that, however, the assessee had done neither; and that thus the assessee had failed to provide any concrete evidence or explanation with regard to this addition also and had, thereby, failed to discharge its onus.

The AO, thus, imposed a penalty of Rs. 6,00,000/- being 111.5% of the tax sought to be evaded, holding that the assessee had furnished inaccurate particulars of its income.

The ld. CIT(A), by virtue of order dated 27.08.2018, upheld the levy of penalty.

The ITAT, vide order dated 05.07.2019, remitted the matter to the file of the Ld. CIT(A), for passing a speaking order on the additional legal ground. It was further directed that in the eventuality of the assessee not succeeding on the legal ground, the issue be decided on merits.

Heard. The facts are not in dispute. The issue is as to whether in the given circumstances, the assessee could be held to have furnished inaccurate particulars of income, thereby ratifying the levy of the impugned penalty. Qua the first issue, it remains undisputed that the depreciation was claimed by the assessee, as worked out by the auditors. It is also not in question that the assessee company is running in profit from year to year and if depreciation were to be reduced in one year, it would have led to increase in depreciation in the subsequent year. Thus, there is no case of furnishing of inaccurate particulars of income. The claim was a bona fide claim made by the assessee on the working of the auditors.

Observation of the court

In ‘Price Waterhouse Coopers (P) Ltd. Vs. CIT’, 348 ITR 306 (SC), the assessee firm filed its return of income along with tax Audit Report. In the Audit Report, it was indicated that provision towards payment of gratuity was not allowable. However, the assessee failed to add provision for gratuity to its total income. It was held that this was a bona fide and inadvertent error; that the assessee was not guilty of either furnishing of inaccurate particulars or attempting to conceal its income; and that, therefore, imposition of penalty was unjustified. In the present case, similarly, depreciation was claimed on the basis of working of the auditors of the assessee. This has not been shown to be a mala fide conduct of the assessee.

In ‘CIT Vs. Sidhartha Enterprises’, ‘“322 ITR 80 (P&H), the assessee claimed set off of capital loss on sale of machinery against profit of business. The AO disallowed the assessee’s claim and imposed penalty for furnishing of inaccurate particulars. The CIT(A) as well as the Tribunal deleted the penalty, recording a finding that the furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax. It was held by the Hon’ble High Court that the penalty u/s 271(1)(c) of the I.T. Act is imposed only when there is some element of deliberate default, and not for a mere mistake; and that in that case, deletion of penalty was justified. The facts of the present case, as discussed, are on similar lines.

In ‘CIT Vs. Rajiv Bhatara’, 360 ITR 121 (P&H), the assessee had furnished a Certificate from the Sub-Divisional Engineer of the PWD, to the effect that the distance from the Sonepat Municipal Committee to the concerned village, where agricultural land was purchased, was 8.2 KMs. Various certificates were also available, wherein, distance had been mentioned regarding the property in question. The Hon’ble High Court held that on facts, there was no intention on the part of the assessee to furnish inaccurate particulars and, hence, no concealment penalty could be levied on the assessee. In the case at hand also, as discussed, there was no intention on the part of the assessee to furnish inaccurate particulars.

In ‘Manoj Ahuja Vs. Inspecting Assistant Commissioner’, 150 ITR 696 (P&H), following ‘Smt. Nirmal Khosla Vs. Union of India’, AIR 1976 Punjab & Haryana 22, it was held that no litigant should ordinarily suffer for a mistake of his counsel. Delay in filing the appeal, incurred due to wrong calculation by the counsel, was condoned. In the case before us also, undisputedly, depreciation was claimed on the basis of working of the auditors.

In ‘CIT Vs. Deepak Kumar’, 232 CTR 78 (P&H), where penalty was levied on the assessee on the ground that the assessee had wrongly claimed depreciation u/s 10(36) of the Act, but the Tribunal found that the assessee had acted on the advice of his counsel, the Hon’ble High Court held it to be a case of bona fide mistake and not a fit case for levy of penalty u/s 271(1)(c) of the Act. The present assessee before us, to reiterate, had, likewise, acted on the advice of the auditors and it was not held to be a mala fide action.

In ‘Pawan Garg Vs. ACIT’, 94 ITR (AT) 159 (Chd. Trib.), the assessee had wrongly claimed long-term capital loss in respect of a property which had been gifted by him to his son. Since the amount of capital loss had been duly disclosed in the computation of income and the assessee had also accepted at the time of assessment proceedings, that by mistake, he had considered the gift made to his son as a transfer, the assessee was held not to have concealed any material fact, and levy of penalty u/s 271(1)(c) of the Act was held not justified. In the case at hand, similarly, the assessee had claimed depreciation on the advice of its auditors. This was a bona fide claim, may be a wrong claim. Otherwise too, the assessee earning profits year to year, reduction of depreciation in one year would have had the impact of higher depreciation in the subsequent year.

No decision contrary to the above decisions has been cited.

Apropos the issue of depreciation on purchase of machinery, as per the assessee, the duplicate bills could not be produced, as the vendor having closed shop, the assessee could not obtain the same, when the original bills stood misplaced. However, as rightly observed by the ld. CIT(A), in the event of the assessee not being able to obtain copies of the bills from its vendor, it ought to have provided the details of such vendor to the Department so as to enable it to ascertain the factual position. The assessee not having done so, an adverse inference was correctly drawn against the assessee and the penalty was rightly levied. However, the penalty ought to have been levied at the minimum rate, i.e., 100% and not @ 111.5 %, as has been done. The AO is directed to scale down the levy of penalty on this count accordingly.

In view of the above, on the first issue, i.e., wrong claim of depreciation of Rs. 15,31,989/-, the penalty levied is deleted. The penalty levied on the second issue, i.e., of disallowance of depreciation of Rs. 2,09,550/-, is directed to be scaled down from the rate of 111.5% to the rate of 100%. Ordered accordingly.

In the result, the appeal is partly allowed.