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2014 DIGILAW 1477 (RAJ)

Punsumi Engineers Ltd. v. Commissioner of Income

2014-08-19

AJAY RASTOGI, J.K.RANKA

body2014
JUDGMENT 1. - These four Income-tax appeals are directed against the common order dated October 7, 2011, passed by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short, "the ITAT") by which the Income-tax Appellate Tribunal, while upholding the order passed by the Commissioner of Income-tax (Appeal) (for short, "CIT(A)"), has dismissed the appeals filed by the appellant-assessee. It relates to the assessment years 1994-95, 1995-96, 1996-97 and 1997-98. The appellant-assessee in these appeals is aggrieved against the sustenance of the penalty under section 271(1)(c) of the Income-tax Act, 1961 (for short, "the IT Act"). Since the issues involved are similar and identical for all these years, all these appeals are being decided by this common order. However, the facts are being taken of DB ITA No. 104 of 2012 for the assessment year 1995-96 as the Income-tax Appellate Tribunal has also chosen to take facts of the assessment year 1995-96. 2. These appeals were listed on August 13, 2014, and on the said date, one Mr. Ashvini Chaturvedi, representative of the appellant, appeared in person and the matter was argued by him at some length but he sought further time to prepare the matter and considering his request, the matter was adjourned for today, however, no one appeared on behalf of the appellant. 3. Since no one is putting appearance on behalf of the appellant despite being aware of the matter being listed today and the lawyer representing the appellant is also aware of listing of matter today but lawyers are also abstaining from attending the court without any cogent reason. We have heard the officer, appearing on behalf of the respondents and perused the impugned order so also the material available on record. 4. The salient features of the case are that the appellant-assessee is a 100 per cent. subsidiary of M/s. Punsumi India Ltd. The appellant-assessee was formed for manufacturing of disc covers which were being used in aluminium electrolytic capacitors. The appellant-assessee though imported plant and machinery from Germany and such plant and machinery though reached Mumbai but was lying with the Customs Department at Mumbai and it is a finding of fact that such plant and machinery never reached the site/workshop/head office of the appellant-assessee and finding no other alternative to recover the customs duty, demurrage and other charges, the Mumbai port authorities sold/auctioned the plant and machinery. It was stated by the appellant-assessee that due to financial problems, it could not clear the dues of the port authorities and, thus, the port authorities had to sell the same. 5. The appellant-assessee entered into a memorandum of understanding (MOU) on October 5, 1992, with the holding company (Punsumi India Ltd.) and as per this agreement, the appellant-assessee acquired technical know-how for manufacturing of stitching and winding machines for the manufacture of electrolytes. The consideration for acquiring the technical know-how for manufacture of stitching and winding machines was Rs. 400 lakhs while the consideration for acquiring the technical know-how for manufacture of electrolytes amounted to Rs. 250 lakhs. Such memorandum of understanding was signed by Shri V.K. Bhargava, chairman of the appellant-assessee and Shri H.C. Chopra, president of Punsumi India Ltd. Both the persons are also directors of the appellant-assessee. The appellant-assessee capitalised the entire amount of Rs. 650 lakhs and claimed depreciation. However, a finding of fact is confirmed by the authorities that nothing was manufactured by the appellant-assessee by using the aforesaid technical know-how. The appellant-assessee again entered into another memorandum of understanding on April 20, 1993, signed by the same persons in the same capacity according to which Punsumi India Ltd. was to manufacture machinery by using the aforesaid technical know-how owned by the appellant-assessee. It was, however, agreed that Punsumi India Ltd. will pay royalty to the appellant-assessee on certain specific rates. During the course of the assessment proceedings, queries were raised by the Assessing Officer (for short, "the AO") with reference to the claim of depreciation on the basis of the above fact. The Assessing Officer also prima facie came to the conclusion that the agreement, as entered into by and between the two companies, i.e., the appellant with the 100 per cent. holding company of the appellant being Punsumi India Ltd., was a transaction only on papers and in fact everything was being shown by way of book adjustments. Finding the aforesaid being a paper transaction, a specific query was raised by the Assessing Officer to the appellant-company as to whether the appellant-assessee is entitled to claim of depreciation on this count. However, it was submitted on behalf of the appellant-assessee that they have shown the royalty income in pursuance of the agreement amounting to Rs. 7,98,915 as also job charges to the extent of Rs. However, it was submitted on behalf of the appellant-assessee that they have shown the royalty income in pursuance of the agreement amounting to Rs. 7,98,915 as also job charges to the extent of Rs. 6,47,837 against which depreciation to the tune of Rs. 1,22,50,341 was claimed. In furtherance of the query, so raised by the Assessing Officer, the Assessing Officer desired justification/genuineness of job work and the Assessing Officer, during the course of investigation, recorded statements of Shri Narendra Singh Negi and Shri Kewal Kishan and it was found by the Assessing Officer that they were employees of Punsumi India Ltd. prior to their working with the appellant and they have been appointed to look after the factory and, hence, machinery was kept there. It was also reiterated by them that the salary was being paid to them by Punsumi India Ltd. and the books of account of the appellant-assessee are also being written by Shri Urvesh Singhal, who is also on the pay roll of Punsumi India Ltd. Finding flaw in the submissions as also the other facts, namely, power consumption, deployment of workers, financial and other factors, the Assessing Officer came to the conclusion that this was a device to evade tax and to justify the claim of depreciation which has been planned and executed by both the directors named above who are also directors in the holding company. In the assessment order, in addition to the above issues, the Assessing Officer observed that the amount shown by way of job charges to the tune of Rs. 6,47,837 and royalty to the tune of Rs. 7,98,915 is so small/meagre which proved that the transaction in between the two was a colourable transaction. It was also observed by the Assessing Officer in the assessment order that against the technical know-how, the charges of Rs. 650 lakhs payable by the appellant-assessee, Punsumi India Ltd. had acquired shares worth Rs. 500 lakhs of the appellant-assessee and the balance was shown outstanding. Accordingly, the Assessing Officer disallowed the depreciation in the assessment order passed on February 23, 1998. 6. The matter was carried in appeal by the assessee before the Commissioner of Income-tax (Appeals). 650 lakhs payable by the appellant-assessee, Punsumi India Ltd. had acquired shares worth Rs. 500 lakhs of the appellant-assessee and the balance was shown outstanding. Accordingly, the Assessing Officer disallowed the depreciation in the assessment order passed on February 23, 1998. 6. The matter was carried in appeal by the assessee before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) sustained the disallowance of depreciation on the facts found and, after considering the material on record, held that the assessee, in fact, had not acquired the technical know-how and, subsequently, the technical know-how was not used by the appellant and the technical know-how, if any, was used by the transferor, i.e., Punsumi India Ltd. and it was further observed by the Commissioner of Income-tax (Appeals) that it is doubtful whether Punsumi India Ltd. itself had any technical know-how as they had not sold the technical know-how to any other company. Dissatisfied with the said sustenance of disallowance, an appeal was preferred by the appellant before the Income-tax Appellate Tribunal and the Income-tax Appellate Tribunal also, vide order dated May 26, 2005, upheld the findings of the Commissioner of Income-tax (Appeals). No further appeal was preferred before this court and, thus, the disallowance of depreciation in all the assessment years attained finality. 7. Consequent to order of the Income-tax Appellate Tribunal, the Assessing Officer issued show-cause notice under section 271(1)(c) of the Income-tax Act requiring the appellant-assessee to substantiate its claim that the depreciation was rightly claimed by it particularly on the basis of the order of the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal, who had sustained the disallowance of depreciation and when the said issue attained finality. No adequate reply was submitted on the instant issue by the assessee and it was merely submitted that the issue may be decided after disposal of the rectification application. It has been observed by the Assessing Officer that the assessee did not place any material during the course of the penalty proceedings and after considering the order of the Income-tax Appellate Tribunal where the disallowance of depreciation was sustained and by observing the material already placed on record, the penalty under section 271(1)(c) of the Act was imposed for all the assessment years. The penalty so imposed had been challenged in appeal before the Commissioner of Income-tax (Appeals). The penalty so imposed had been challenged in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) also upheld the penalty and came to the conclusion that the assessee was not able to controvert the finding of fact in the assessment proceedings that the transaction was a colourable device merely on papers and upheld the penalty. Dissatisfied with the sustenance of the said penalty, the matter was carried in appeal before the Income-tax Appellate Tribunal and the Income-tax Appellate Tribunal, vide the impugned order dated October 7, 2011, has upheld the finding of the Commissioner of Income-tax (Appeals) after analysing the evidence on record as also the case law relied upon by both the sides,. Thus, the appellant-assessee has now assailed the impugned order by challenging the same for all the assessment years. 8. Upon a perusal of section 271(1)(c) of the Income-tax Act it goes to show that the penalty can be imposed by the Assessing Officer or the Commissioner (Appeals) or the Commissioner, as the case may be, if the assessee has concealed the particulars of his income or has furnished inaccurate particulars of such income. Therefore, the Assessing Officer has first to satisfy as to whether the assessee concealed the particulars of income or has furnished inaccurate particulars of such income. In so far as this fact is concerned, all the three authorities in unison have come to the conclusion that the intention of the assessee was to evade tax and it would be appropriate to quote the factual finding of Income-tax Appellate Tribunal while sustaining disallowance of depreciation. The Income-tax Appellate Tribunal, vide order dated May 26, 2005, while sustaining the disallowance of depreciation, specifically came to the conclusion that there was a colourable device in between two interconnected companies and the findings arrived at by the Income-tax Appellate Tribunal is reproduced ad infra : "We have heard both the parties at length and gone through the material available on record from which it appears that M/s. Punsumi India Ltd. has transferred technical know-how to the assessee-company. It does not mean that M/s. Punsumi India Ltd. has ceased the technical know-how. It does not mean that M/s. Punsumi India Ltd. has ceased the technical know-how. It might have also possessed the same technical know-how so there is no question to acquire this technical know-how from this company because this technical know-how was originated by M/s. Punsumi India Ltd. and they were having the monopoly over the technical know-how. It was not patented technical know-how. In other words, M/s. Punsumi India Ltd. was having that technical know-how so far as the business interest and they have sold it to the assessee and might be to other legal entities. It was not sold with the patent rights. In fact, this technology was not patented as the same was simple technology which is very common. No special significance or patent material was ever submitted or claimed by the assessee. In these circumstances, it is surprising how and why the so-called technology again was taken on royalty basis which was earlier sold. This is nothing. This is merely a paper transaction. In fact, no technical know-how was acquired by the assessee in the absence of the plant and machinery. No resolution was passed by the board of directors. No document has been executed except the memorandum of understanding. This shows that there was colourable device. In plant and machinery, the technical know-how was of no use. It may be mentioned that the assessee has not fully co-operated with the lower authorities so they issued the summons under section 131 to the employees of M/s. Punsumi India Ltd., who were also looking the interest of both the companies. The brains of both the companies are common. In these circumstances, we find no merit in the claim of the assessee. Without repeating, we uphold the order of the lower authorities, who have rightly denied depreciation amounting to Rs. 1,22,50,341 for technical know-how. The orders of the lower authorities are hereby sustained along with the reasons mentioned therein." (emphasis supplied) 9. The finding of fact arrived at by the Income-tax Appellate Tribunal, in quantum proceedings referred to above, attained finality. Now, on the face of it, in the assessment proceedings, the depreciation has been held to be based merely on a paper transaction in between the two inter connected parties even when the memorandum of understanding having not been properly acted upon. Now, on the face of it, in the assessment proceedings, the depreciation has been held to be based merely on a paper transaction in between the two inter connected parties even when the memorandum of understanding having not been properly acted upon. We need not quote the language of the two memorandum of understandings entered into by and between the assessee and Punsumi India Ltd. dated October 5, 1992, and April 20, 1993, but in the quantum (regular) proceedings all the three authorities have elaborately discussed about the salient features of the memorandum of understandings and after recording finding of fact came to the conclusion that the memorandum of understandings are merely on papers and the entire transaction is sham and colourable one and sustained disallowance of depreciation which is based on appreciation of evidence and the concurrent finding of fact not only by the Assessing Officer but the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal in the quantum proceedings but all the three authorities in unison in the present proceedings have again held that the memorandum of understandings were merely on papers and had not been acted upon. It is also a finding of fact that not a single amount passed in between both the parties except the book adjustments which remained on paper only. 10. Once the addition was sustained by the Income-tax Appellate Tribunal, primarily the onus shifted on the assessee to prove otherwise. We are conscious of the fact that the penalty is distinct and separate and different conclusion can be reached in the context of penalty and the finding reached in quantum proceedings may not hold good but then it was for the appellant-assessee to have submitted material contrary to which the Income-tax Appellate Tribunal placed reliance at the time of passing of the order dated May 26, 2005. We have gone through the reasoning of the Assessing Officer in the penalty proceedings and the Assessing Officer observes that the appellant-assessee have not filed a proper explanation/reply and merely stated to grant further time, it is observed by the Assessing Officer in this regard as under : "A show cause, vide the notice dated November 9, 2005, has been issued and duly been served. The assessee was required to file its reply by December 28, 2005. The assessee was required to file its reply by December 28, 2005. In compliance with the above, the asses see, vide its letter dated December 19, 2005, stating therein that this issue may be decided after the disposal of rectification application on deletion of the addition made by Assessing Officer on protective basis in respect of job charges." 11. Thus, despite of an adequate opportunity having been granted to the appellant-assessee by the Assessing Officer, the appellant-assessee simply wanted to defer the matter knowing fully well that the penalty proceedings would get time barred by the end of December, 2005. Therefore, the onus and the burden, which lay heavily on the appellant-assessee to place adequate material to controvert, as penalty being distinct and separate, was not availed of by the appellant-assessee. The burden which shifted on the assessee was not discharged. Even before the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, no specific point was raised except that the Assessing Officer is not right in treating the transaction as a measure of tax evasion or that the conclusion of the Assessing Officer is based on suspicion and surmises and that the Income-tax Appellate Tribunal has also decided the matter on the basis of suspicion and surmises. The Income-tax Appellate Tribunal, by the impugned order has sustained the penalty as no new fact or material was brought by the appellant-assessee even before the Income-tax Appellate Tribunal to come to a different conclusion. Before the Income-tax Appellate Tribunal, one additional fact was mentioned that "the claim was made on account of mistake on the part of the auditor and because of the mistake of the auditor, the assessee ought not to have been penalised". However, the assessee has not been able to substantiate its claim as to how there was a mistake on the part of the auditor and there is no affidavit or explanation of the auditor that a mistake was committed by the auditor in giving an advise in the manner the depreciation was claimed. The finding of the Income-tax Appellate Tribunal is based on facts that there is no explanation on record to suggest that the claim of depreciation made by the assessee was bona fide. There is a difference between a wrong claim and a false claim. The finding of the Income-tax Appellate Tribunal is based on facts that there is no explanation on record to suggest that the claim of depreciation made by the assessee was bona fide. There is a difference between a wrong claim and a false claim. If there is a wrong claim on the basis of a bona fide opinion, then penalty perhaps is not imposable. If the claim is debatable as per the decision of different appellate authorities, then also penalty is not leviable. However, if the claim is false then penalty is definitely leviable. 12. In the impugned order of the Income-tax Appellate Tribunal as well as the other authorities, in the written submissions and the present appeal, the assessee has harped that even as per the Assessing Officer the claim was allowable under section 35AB of the Income-tax Act to the extent allowable at one-sixth for 6 years so as to justify its claim that in any case it was allowable, we are afraid the assessee has wrongly put in the said claim when a passing reference has been made by the Assessing Officer. The assessee nowhere raised such a plea or claim nor any basis was forthcoming on the part of the assessee in any of the explanation before any of the authorities neither at the time of regular assessment nor during the penalty proceedings. The assessee appears to be taking the benefit of the Assessing Officer's passing reference in the assessment order which reads "without prejudice to the above, if at all the claim of the assessee is right, then it should have been claimed under section 35AB to which one-sixth of the total cost is allowable for 6 years". In our view, no claim was before the Assessing Officer but the Assessing Officer, on his own has observed this fact without at all, any issue or claim on behalf of the assessee and the same cannot be said to be view of the Assessing Officer that it was admitted by the Assessing Officer and rejected by the Income-tax Appellate Tribunal. 13. One more question has been framed that the order of penalty passed on December 30, 2005, was beyond 6 months and is beyond the period of limitation under section 275(1)(a) as the order of Income-tax Appellate Tribunal upholding the disallowance of depreciation is dated May 26, 2005. 13. One more question has been framed that the order of penalty passed on December 30, 2005, was beyond 6 months and is beyond the period of limitation under section 275(1)(a) as the order of Income-tax Appellate Tribunal upholding the disallowance of depreciation is dated May 26, 2005. We fail to understand the ground raised for the first time before us and do not find the said claim having been ever raised before any of the three authorities and thus the claim even otherwise could not have been raised for the first time and thus deserves to be rejected. Even otherwise, penalty can be imposed in six months from the end of the month in which the order of the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later, is reckoned as the aforesaid from the time the order is received by the Chief Commissioner or the Commissioner of Income-tax under section 275(1)(a) and not from the date of the order of the Income-tax Appellate Tribunal for the purposes of penalty. 14. So long as the assessee has not concealed any material fact or the factual information given by him, has not been found to be incorrect, he will not be liable for imposition of penalty under section 271(1)(c) of the Act even if the claim made by him is unsustainable in law provided that he either substantiates the explanation offered by him or the explanation is found to be bona fide. If the explanation is neither substantiated nor shown to be bona fide, the Explanation under section 271(1)(c) would come into play and the assessee would be liable for the prescribed penalty. A claim made by the assessee needs to be bona fide and if the claim, besides being incorrect in law, is mala fide, Explanation 1 to section 271(1)(c) would come into play and work to the disadvantage of the assessee. We have already observed herein above and the finding of the Income-tax Appellate Tribunal, which is a final fact finding authority that the assessee claimed depreciation which was never allowable and the assessee was aware of the true nature of the transaction despite which the claim for depreciation was made. Its claim was rejected by the Tribunal in the quantum proceedings and that order has attained finality. Its claim was rejected by the Tribunal in the quantum proceedings and that order has attained finality. The explanation given by the assessee for the claim of depreciation is neither bona fide nor substantiated. All these are on the basis of appreciation of evidence on record found by the lower authorities and thus, the impugned order is based on appreciation of evidence and has been reached on a finding of fact. 15. In view of what we have observed herein above, vis-a-vis the finding of fact recorded by the Income-tax Appellate Tribunal as also the other lower authorities, which is based on appreciation of evidence and material on record, not only in the penalty proceedings but also in the regular (quantum) proceedings and no question of law much less substantial question of law can be said to arise out of the order passed by the Income-tax Appellate Tribunal. We do not find any perversity or illegality in the order of the Income-tax Appellate Tribunal. 16. Consequently, all the four appeals, being devoid of merits, are hereby dismissed in limine. *******