Claiming depreciation by unlawfully representing a loan transaction as a lease transaction would attract penalty

The ITAT Mumbai in the case of Times Guaranty Ltd., Times of India Building, Dr. D.N. Road, Mumbai – 400 001, vs. ACIT, Circle 1(3), Aayakar Bhavan, Mumbai, ITA No.1681/M/2007, in connection with the Assessment Year 1993-94, has held that claiming depreciation by unlawfully representing a loan transaction as a lease transaction would attract penalty.

Brief facts of the case: Claim of Depreciation on Leased Assests

The appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals) on 05.12.2006 relating to the assessment year 1993-94. The assessee through its grounds of appeal challenged the confirmation of levy of penalty of Rs.1, 44, 41,888/- under the provisions of section 271(1) (c) of the Income Tax Act.

For the relevant Assessment Year, the assessee filed return of income declaring loss of Rs.1, 15, 55,000/-Thereafter, the assessment was reopened as per section 147 of the Act and an order as per 143(3) read with section147 of the Act was passed on 30.03.1999. An income of Rs.4, 66, 13,960/- was assessed by the authorities.

The main ground based on which the addition was made by the Assessing Officer was the claim of depreciation on leased assets.

The Assessing Officer after considering the issue disallowed the claim of depreciation of Rs.5, 78, 23,526/- on the non-existing lease assets. The Assessing Officer gave a finding that the assets leased to M/s. Prakash Industries Ltd. were not in existence on the basis of an investigation conducted by the Department.

Penalty proceedings under section 271(1) (c) of the Act were also initiated against the assessee for furnishing incorrect details of income.

Aggrieved by the said order, the assessee preferred an appeal before the CIT (A). The Ld. CIT (A) disposed off the appeal through order dated 4.9.2000 with the observation that lease transactions were financial transactions and accordingly depreciation cannot be allowed. The ground for consideration was dismissed. The limitation period for completion of the penalty proceedings was also thereby extended.
Aggrieved by the said order, the assessee preferred an appeal before the ITAT Mumbai.

The judgment:

The statements and submissions made by the assessee reflected that they were based on the explanations filed before the Assessing Officer. During the course of assessment proceedings, they were considered and were also discussed in the assessment order. It was held that bringing the issues of the assessment proceedings for reconsideration before the appellate authority proceedings, was beyond the purview of the case and not permissible under law.

Penalty and Assessments Proceedings are distinct

It was further held that the penalty and assessment proceedings are distinct at cannot be reconsidered for interpretation for the purpose of proceedings under section 271(1) (c) of the Act.

The separate nature of the assessment proceedings and penalty proceedings had reached the finality, and were passed rightly.

The submissions made on behalf of the Revenue where ground of factual discrepancy was raised, were dismissed as being irrelevant for the proceedings under section 271(1) (c). The penalty order passed was based on the facts and decided after considering the submissions of the appellant before the Assessing Officer and also during the appellate proceedings against the order of the assessment. It was observed that there was no change in the facts of the case regarding leasing out of the assets as held by the Assessing Officer to be actually a finance transaction.

The claim of depreciation of the appellant was held as unsubstantiated according to the assessment order under section 143(3) and 147. Only pointing out discrepancies without establishing the claim was incorrect and cannot be allowed. The fact remains that the assessee had claimed depreciation as was reflected in the books of account as a malafide with full intention. This proved the mens rea. It was a deliberate action by the appellant to conceal the discovery of facts.

Whether there is concealment is a question of fact and has been recorded in the assessment and the penalty orders.

It was observed that that the Assessing Officer recorded the reasons and satisfaction for invoking the penalty proceedings as per section 271(l)(c) of the assessment order. It was held that the assessee has willfully concealed the particulars of income by making false claim of depreciation on leased assets to get the tax benefit of depreciation under the Act.

In view of the above observations, J. Sanjay Garg dismissed the appeal of the assessee.

Related Read- Depreciation on Assets installed in Discontinued Business