Andhra Pradesh H.C : the appellant has used Balzers Vacuum Coating Bak 600 Machine for the purpose of business as understood under Section 32

High Court Of Andhra Pradesh

Vinod Bhargava Vs. CIT, Hyderabad

Section : 32, 271(1)(c)

Assessment year 1987-88

L. Narasimha Reddy And Challa Kodanda Ram, JJ.

Reference Case No. 153 Of 1986

June 10, 2014


L. Narasimha Reddy, J. – Both these Revision Cases are in relation to same assessee and same items. Hence, they are disposed of, through the common judgment.

2. The applicant in both the revision cases is an industry involved in the manufacture and supply of certain critical optical equipments, mostly used in Defence Sector. It imported an item, by name, Balzars Vacuum Coating Bak 600 Machine, from a foreign country, in the year 1987. In the returns filed for the assessment year 1987-1988, the applicant claimed 100% depreciation on the imported equipment. The Assessing Authority disallowed the claim of the applicant, taking the view that the installation itself was at the fag end of March, 1987, and that it cannot be said that the installation was complete, and since there is no proof of use of the machinery, the question of allowing depreciation does not arise. Apart from disallowing the claim of the applicant, the Assessing Authority levied penalty of Rs.25,88,650/-.

3. The applicant filed two separate appeals before the Commissioner of Income Tax. The Commissioner took the view that there is evidence to show that the installation of machine was complete, by the end of the Assessment Year 1987-1988, but there is no proof as to usage of the machinery and, accordingly, dismissed both the appeals. The applicant carried the matter in further appeal numbered as Appeal Nos. 896/Hyd/1991 and 1016/Hyd/1995, to the Income Tax Appellate Tribunal, Hyderabad Bench B (for short the Tribunal). The appeals were dismissed on 29.04.1994 and 03.09.1996, respectively.

4. The applicant filed two applications, being R.A.Nos.346/Hyd/1994 and 813/Hyd/1996 in the appeals, under Section 256(1) of the Income Tax Act (for short the Act), with a prayer to frame questions and refer the same to this Court. After hearing both the parties, the Appellate Tribunal framed the following questions in I.T.A.No.896/Hyd/1991 and referred the same to this Court for opinion, 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 Balzers Vacuum Coating Bak 600 Machine for the purpose of business as understood under Section 32 of the Income Tax Act and the same while computing the income 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 is assumed that the machinery was installed on 29th March, 1987 as contended by the assessee there is no proof that the said machine was put to use for the purpose of the business of the assessee on 30.03.1987 and 31.03.1987 within the meaning of Section 32(1) of the Income Tax Act for claiming depreciation?

(3)Whether on the facts and in the circumstances of the case, the appellant is entitled to allowance of depreciation of Rs.49,75,808/- on Balzers Vacuum Coating Bak 600 machine while computing its income for the assessment year 1987-88?

Similarly, in I.T.A.No.1016/Hyd/1996, the following questions were framed and referred to this Court and it is taken up as R.C.No.74 of 1997:

(1)Whether on the facts and in the circumstances of the case, the Tribunal was justified in refusing to admit as additional evidence the sworn depositions of the Assessing Officer recorded in the prosecution proceedings in the Court of Special Judge for Economic Offences, Hyderabad for the purpose of deciding the justification of imposition of penalty under Section 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, the Appellate Tribunal was justified in holding that the assessee was liable for imposition of penalty under Sec.271(1)(c) of the Act for claiming depreciation on its plant and machinery?

(3)Whether the appellate tribunal is justified in upholding the order of the Appellate Commissioner of Income Tax confirming the imposition of penalty under Sec.271(1)(c) of the Act when the assessee had made bona fide disclosure of all material facts in relation to the computation of its income as provided in Explanation-I to Section 271(1)(c) of the Income Tax Act, 1961?

5. 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 electrical connections were to be given, there was no major work to be undertaken for installation. He contends that the Appellate Authority itself took the view that the machinery reached Hyderabad on 28.03.1987 and its installation was complete before the end of the financial year, and still, depreciation was disallowed. He further submits that the requirement, under the provisions of the Act that allows depreciation, is that the machinery must be capable of being used and, in that view of the matter, the depreciation ought to have been allowed.

6. The learned counsel further submits that the investment upon the imported machinery was huge, and with an intention to avail the benefit under the Act, at the earliest, the applicant claimed depreciation in the financial year 1987-88, and if for any reason, the depreciation was impermissible, there was no justification for imposition of the penalty. He submits that when law confers some benefit in the form of depreciation on an assessee, an attempt made to avail it must not lead to penalization. He further submits that there was no intention on the part of the applicant to commit fraud, and the very fact that the machinery was found to have been installed, would render the imposition of penalty untenable.

7. Sri S.R. Ashok, learned Senior Counsel for the Income Tax Department, submits that depreciation is a facility created under the Act, subject to certain conditions, and once it emerged that the applicant did not comply with the conditions, it is not entitled to claim the benefit. Learned Senior Counsel further submits that mere installation of machinery is not sufficient and what entitles an assessee, to claim depreciation, is the factum of the machinery having been put to use. He contends that even what is stated by the applicant cannot be treated as an act of use.

8. As regards the penalty, the learned counsel submits that once the claim is found to be untenable, the imposition of penalty, under Section 271(1)(c) of the Act, becomes almost a matter of course, and that the questions referred to it deserve to be answered against the applicant.

9. The applicant made an effort to claim depreciation, under Section 32 of the Act, on an item of machinery, imported from a foreign country. The law, as it stood at the relevant point of time, provides for depreciation to the extent of 100% on the items imported by the applicant.

10. The Deputy Commissioner of Income Tax (Assessments), Special Range-3, Hyderabad, before whom the returns were filed, entertained a doubt as to the very date of installation. He has not only undertaken the close scrutiny of the relevant documents, but also has recorded the evidence of various persons connected with the matter. An order, running into 31 pages, was passed, discussing various aspects. The deposition of witnesses, together with the questions and answers, was incorporated. Ultimately, he passed an order, dated 29.03.1990, taking the view that the installation of machinery itself was not complete by 31.03.1987, and accordingly, the depreciation was allowed. He has also imposed the penalty of Rs.25,88,650/-.

11. The Commissioner (Appeals), however, took the view that though the installation part of it may have taken place, it was not effective to the extent of making the machinery capable of being put to use and that, in fact, the machinery was not put to use. Therefore, the Appellate Commissioner confirmed the findings of the Assessing Authority. The Tribunal dismissed the further appeals.

12. On several occasions, the Honble Supreme Court interpreted the expression used for the purposes of the business that finds place in Section 10 of the Indian Income Tax Act, 1922. Reference, in this context, may be made to The Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar . It was held that not only the machinery or plant must have been installed, but also it must have been used for the purpose of business, meaning thereby, much more than mere trial run. This view was adopted by the Karnataka High Court in Dy CIT v. Yellamma Dasappa Hospital [2007] 290 ITR 353/159 Taxman 58 and the Bombay High Court in Dineshkumar Gulabchand Agrawal v. CIT. [2004] 267 ITR 768/141 Taxman 62 Viewed from that angle, it can be said that though the applicant might have installed the machinery before 31.03.1987, it was not capable of being put to use, much less, it was, in fact, put to use. Therefore, the questions framed in R.C.No.153 of 1996 are answered against the applicant and in favour of the Income Tax Department.

13. Now, it remains to be seen, as to how the questions in R.C.No.74 of 1997 need to be answered. Penalty was imposed upon the applicant, almost as a consequence of disallowing depreciation. Section 271 of the Act, no doubt, confers power upon the Income Tax Officer to levy penalty, if it is found that any claim made by the assessee is found to be wrong.

14. Two aspects become relevant here. The suppression or misstatement, on the part of an assessee, which in turn, is noticed by the Income Tax Officer in the course of processing the return on the one hand, and a claim made by the assessee, turning out to be not permissible in law, on the other hand.

15. On the first aspect, penalty can be imposed, as a matter of course. The reason is that the assessee was not truthful in submitting the returns. If any information was suppressed by the assessee and but for the attentiveness of the Income Tax Officer, it would have escaped taxation, the assessee must certainly be dealt with sternly. Where, however, the assessee honestly files returns by presenting the facts known to him and claims some benefit in his understanding of the law, the mere fact that a different view is possible on some of the claims, must not lead, straight away, to imposition of penalty. Denial of benefit itself would be a phenomenal disadvantage to the assessee.

16. No one can claim that his understanding of a provision of law, that too, of a complicated and ever-changing enactment like the Income Tax Act, is the ultimate or free from flaw. Even the view taken by Courts of law, after so much of hearing and deliberation, turns out to be incorrect by a superior forum. A genuine effort made by the applicant to claim depreciation on the imported machinery, must not result in double disadvantage, namely, denial of depreciation and imposition of penalty. Things would have been different altogether, in case any depreciation was claimed, on the machinery that was not imported at all. Therefore, the questions framed in R.C.No.74 of 1997 are answered in favour of the assessee and against the Income Tax Department.

17. Accordingly, R.C.No.153 of 1996 is dismissed and R.C.No.74 of 1997 is allowed. There shall be no order as to costs.

18. The miscellaneous petitions filed in the reference cases shall stand disposed of.

[Citation : 367 ITR 122]

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