The Income Tax Appellate Tribunal ( ITAT ), Chandigarh Bench, has recently, in an appeal filed before it, held that a wrong claim of depreciation does not attract a penalty.
The aforesaid observation was made by the Chandigarh ITAT, when an appeal was preferred before it by the assessee M/s Headmaster Saloon Pvt. Ltd., for the assessment year 2012-13, against the CIT(A) order dated 19.12.2019, confirming the levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
The grounds of the assessee’s appeal are that the Commissioner of Income Tax(A), has failed to appreciate the facts and circumstances of the case and has thereby erred in upholding penalty u/s 271(l)(c) of the Income Tax Act, 1961 on merits as well as in law, thereby brushing aside the direction of the ITAT without appreciating the facts and legality of the case, and further that there was no concealment of income or furnishing of any inaccurate particulars of income and that the Assessing Officer had erred in failing to mention whether notice u/s 271(l)(c) of the Income Tax Act, 1961, was issued for concealment of income or furnishing of any inaccurate particulars of income, the facts of the case were that in the assessment proceedings, the Assessing Officer (AO) had so noticed that, during the F.Y. 2011-12, relevant to the assessment year under consideration, i.e., the assessment year 2012-13, there was an increase of Rs. 2,68,12,425/- worth of fixed assets of the assessee.
As per the tax Audit Report, major capital expenditure had been incurred on three items, wherein the AO had further noticed that the assessee had capitalized interest amounting to Rs. 6,95,836/-, which indicated that some machinery had not been put to use, for which, the interest had been capitalized. Further, from the bills produced by the assessee, it was also observed by the AO observed that invoices were dated 7.10.2011 on three items and that the assessee had claimed that the assets had been put to use on 25.09.2011.
Thus, the AO found the assessee to be claiming depreciation @ 15%, i.e., for the full year, whereas it was eligible for depreciation @ 7.5%, i.e., for half year only. And subsequently, such depreciation of Rs. 15,31,989, was disallowed and was added to the income of the assessee by the AO.
With the AO further observing that the assessee had not been able to produce invoices for the assets purchased for Rs. 27,94,120/-, on the ground that the assessee had lost the bills, the AO observed that as per the tax Audit Report, the items had been booked under the head ‘Plant and Machinery’. And from this, the AO was of the view that the assessee’s auditor had not verified as to which item had been purchased, as there was neither any bill number nor any party name, which could have helped the assessee to establish the purchase to be genuine.
Thus, the AO observed that the assets had in fact not been purchased and were not put to use. And as such, depreciation of Rs. 2,09,559/- was disallowed and added back to the income of the assessee. The WDV of the total fixed assets was reduced by an amount of Rs. 27,94,120/-.
Thus, the AO, by virtue of the assessment order dated 29.09.2015, made the addition of Rs. 15,31,989/- on account of a wrong claim of depreciation and that of Rs. 2,09,559/-, on account of the claim of depreciation on the purchase of machinery of Rs. 27,94,120/, but 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, wherein the assessee maintained the stand taken during the assessment proceedings. And with regard to the issue of addition on account of the 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, and could also not be proved that the machinery had been put to use in September 2011. And thus, the AO was of the view, that the assessee had failed to produce any concrete evidence or explanation and it had, therefore, failed to discharge its onus.
And concerning the second issue of disallowance of depreciation amounting to Rs. 2,09,559/-, in the reply to the show cause notice, the assessee had merely stated that the purchase bills had been misplaced, wherein the AO observed that such contention of the assessee could not be accepted, for 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. He thus opinioned that as the assessee had done neither, the assessee had thus, failed to provide any concrete evidence or explanation with regard to this addition also and had, thereby, failed to discharge its liability.
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. And the assessee thus approached the CIT(A), who, by virtue of an order dated 27.08.2018, upheld the levy of penalty.
Aggrieved by the same, the assessee preferred an appeal before the ITAT, wherein, additional ground was raised by the assessee that the AO has erred in law, in failing to mention, whether notice u/s 271(1)(c) issued was for concealment of income or furnishing of inaccurate particulars of income, and as such penalty imposed and upheld by the Commissioner of Income Tax (Appeals) in pursuance of an invalid notice, is illegal, arbitrary & unjustified.
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, along with a further direction that in the eventuality of the assessee not succeeding on the legal ground, the issue be decided on merits.
However, by virtue of the impugned order dated 19.12.2012, the CIT(A) dismissed the appeal of the assessee in toto, i.e., on both, the legal as well as the regular ground on merits, and it is being aggrieved by the same, that the assessee has preferred the instant appeal before the Chandigarh ITAT.
With Sh. Tej Mohan Singh, the counsel for the assessee, having contended that while wrongly confirming the penalty levied on the assessee, the CIT(A) has erred in brushing aside lightly, the directions issued by the Tribunal in the first round, without appreciating the facts and legality of the case, and further that the CIT(A) failed to appreciate that the assessee did not furnish any inaccurate particulars of its income, but there was a mistake on the part of the Chartered Accountant, Smt. Amanpreet Kaur, the Sr. DR, on the other hand, placed strong reliance on the impugned order, thereby submitting that the plea of mistake, even if it is a bona fide mistake, cannot bail out the assessee from levy of penalty.
Hearing the opposing contentions of either side and perusing the materials available on record, the ITAT Bench consisting of the Accountant Member, Vikram Singh Yadav, along with A.D Jain, the Vice – President, observed:
“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 inaccurate particulars of income. The claim was a bona fide claim made by the assessee on the working of the auditors.”
Thereby relying upon various judicial precedents, the Chandigarh ITAT noted:
“Apropos the issue of depreciation on the purchase of machinery, as per the assessee, the duplicate bills could not be produced, as the vendor having a 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, 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., the 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.”, partly allowing the assessee’s appeal, the ITAT thus, held.
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