Judgment:
1. The short issue that we are required to adjudicate in this appeal is whether or not the learned Commissioner (Appeals) was justified in upholding penalty of Rs. 13,56,000 on the assessee. The relevant assessment year is 1993-94 and the impugned penalty was imposed under Section 271(1)(c) of the Income Tax Act, 1961.
2. The quantum additions, on the basis of which impugned penalty is imposed, consist of (a) disallowance of depreciation of Rs. 23,24,544; and(&) disallowance of deduction of Rs. 34,771 under Section 35D of the Act, for amortization of preliminary expenses.
3. As regards the main quantum addition, the Assessing Officer disallowed depreciation on aircraft on the ground that the lease agreement under which the aircraft was acquired was for operations lease and not financial lease. It was emphasized that as per the lease terms aircraft always belonged to the lessor. This arrangement did not therefore lead to any rights being created in the hands of the lessee i.e., the assessee-company. Accordingly, assessee's claim for depreciation on aircraft, which was made on the basis that lease arrangement was a de facto finance transaction, was erroneous. The disallowance so made was not carried in appeal and the assessee accepted the same. As for the disallowance of deduction under Section 35D to the extent of Rs. 34,771, was inter alia, also on the basis that aircraft could not have been shown as an asset by the assessee, and, accordingly, its inclusion in the capital employed was erroneous. This disallowance was also accepted by the assessee.
4. It was in the backdrop of above quantum additions that the assessee was required to show cause as to why concealment penalty under Section 271(1)(c) should not be imposed on the assessee, as the assessee has, according to the assessing officer, wilfully furnished the incorrect particulars and thereby concealed the income. It was amongst other things, pointed out by the assessee that assessee had genuine belief that the depreciation is admissible for depreciation as the lease arrangement is a de facto finance arrangement which specifically provides for purchase of aircraft at nominal value at the end of the lease terms. It was also pointed out that in any event it was not a case of claiming depreciation on aircraft as also claiming deduction for lease rental paid, and that the assessee is, under any circumstances, eligible for at least one of these two benefits. The attention was also invited to notes in the annual accounts. Ignorance of legal niceties was also claimed as a reason for error, if any. None of these arguments, however, impressed the assessing officer. He imposed the impugned penalty by concluding as follows: 5.1 have duly considered the explanat of the assessee. There is no doubt that the action of making a wrong claim of depreciation has been admitted. The assessee's contention that it had only relied on its auditors is not acceptable as it is the assessee under whose authorisation its representatives act. The auditors have no personal liability in such affairs. Having entrusted the responsibility on auditors, the assessee binds itself with the representations and treatments given by them in its books of account. The said argument is further found to be of no help to the assessee as in the instant case the assessee is indeed not a layman. This is the case with substantia.l stakes, global agreements and significant expertise.
Each step in such enterprise has to be supported by reliable g;uidance. Under such circumstances, there is no reason, except for a deliberate f alse claim, that a wrong claim of depreciation will be made by the assessee. Had the issue of allowability of depreciation not been raised during the assessment proceedings, the assessee would not have produce the agreement dated 15-7-1993 and would have easily walked away with its false claim of depreciation on the basis of registration in DGCA only. I find that the false claim of depreciation was made on the mere basis of registration of the assessee with DGCA as the owner of aircraft and with the anticipation that there would but no occasion for the scrutiny of actual agreement which shows that ownership never passed on to the assessee-company. I accordingly find that the assessee is liable for penalty under Section 271(1)(c) on account of false claim of depreciation of Rs. 23,24,544 as it made a conscious attempt to reduce its tax liability by furnishing inaccurate particulars of its income.
6. As regards the excessive claim of deduction under Section 35E, the assessee has not fumished any explanat. It is however clear that the assessee has not been able to justify the same in any manner. It is clear that deduction under Section 35D was eligible to the assessee in respect of the share capital of Rs. 5,00,000 only and that nothing else was eligible for being included within the definition of capital employed. The assessee however claimed the 10 per cent of the expenses of Rs. 3,47,712 straight-away and thereby attempted to reduce its tax liabilities further. Since the assessee by such act furnished inaccurate particulars of its income I find it liable for penalty under Section 271(1)(c) on this account also.
5. Aggrieved, assessee carried the matter in appeal before the learned Commissioner (Appeals) but without any success. The learned Commissioner (Appeals), while confirming the penalty, observed as follows: I have considered the submissions of the appellant and find that the appellant has been shifting stands on the issue and nature of acquisition and the depreciation on the aircrafts. During the assessment and penalty proceedings, he attributed the mistake of claiming depreciation to the CAs and now during the appellate proceedings before me he has propounded the theory of hire-purchase agreement justifying the claim of depreciation. This shift in stand of the appellant apparently arises out of appellate order of my learned predecessor on the same issue in the case of the same assessee for assessment year 1995-96 in which the penalty imposed under Section 271(1)(c) has been confirmed. My learned Predecessor has held in his order in Appeal No. IT-304/98-99/651, dated 20-12-1999 that the plea on account of wrong advice given by the counsel, the appellant had claimed depreciation on aircrafts cannot be held as such in the absence of the names of such counsels remaining to be disclosed. In fact such an explanation is an after-thought in order to evade the imposition of concealment of penalty for furnishing of inaccurate particulars. A plain and simple reading of the lease agreement would convince any one that the aircrafts had been taken on lease for a specified period and the right of ownership on such aircrafts vested with the lessor.
My learned predecessor in his order (supra) confirmed the penalty after thorough discussion on the issue. For the reasons given in that order in detail and the facts being the same, I confirm the penalty of Rs. 13,56,000 imposed under Section 271( l)(c) of the Income Tax Act, for the year under consideration also.
6. Not satisfied with the order of the learned Commissioner (Appeals) also, the assessee is in further appeal before us.
7. We have heard Shri Yogesh Thar, learned Counsel for the assessee, and Shri Vijay Verma, learned Senior departmental Representative. We have also carefully perused the material on record and carefully considered factual matrix of the case as also the applicable legal position.
8. It is difficult to miss, even on a cursory look at the impugned orders, that the authorities below have proceeded to hold it to be a fit case for imposition of penalty merely because the assessee in their respective opinion, made erroneous claim of depreciation deduction as also deduction for amortization of preliminary expenses. This approach, in our considered opinion, is erroneous and unsustainable in law.
9. A view is indeed possible that in the light of Hon'ble Supreme Court's judgment in the case of K.P. Madhusudhanan v. CIT it is no longer necessary that revenue is required to prove mens rea, and, therefore, independent finding about the conscious concealiment is no longer a condition precedent to imposition of penalty under Section 271(1)(c) read with Explanation 1 to Section 271.
The school of thought casting onus on revenue to prove the mens rea, as advanced by sorae legal precedents may be viewed as having been rejected by the Hon'ble Supreme Court. However, it is also not the legal position that the penalty , can also be imposed without anything more than quantum addition. The explanation given by the assessee for claiming the deduction has to be objectively considered by the assessing officer. What the assessing officer has to examine is whether the explanation given by the assessee or the conduct of the assessee meets the tests of human probabilities. Strictly speaking, mens rea may not require to be proved by the revenue, but then at least the revenue has to demonstrate that the assessee has behaved in a manner which is not justified on the test of reasonable human probabilities, and the explanation given by the assessee falls in the category of acceptable explanations. In CIT v. Nathulal Agarwala & Sons .
Full Bench of the Hon'ble Patna High Court had, inter alia, observed as follows: As to the nature of the explanation to be rendered by the assessee, it seems plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is given, the burden upon him would be discharged and the presumption rebutted. It is not the law and perhaps hardly can be that any and every explanation by the assessee must be accepted. In my view, the explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation. He may not prove what he asserts to the hilt positively but as a matter of f act materials must be brought on the record to show that what he says is reasonably valid.
10. The above views were approved by the Hon'ble Supreme court in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 142. Ref erring to the judgment of Hon'ble Patna High Court. Their Lordships observed : Undoubtedly, it is thus clear that in the considered view of Hon'ble Supreme Court.
The Patna High Court emphasized that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted. We agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be acceptable explanation, acceptable to a fact-finding body.
11. In the light of the above legal position, let us examine the explanation of the assessee. The explanation of the assessee was that he was of the bona fide view that the aircraft lease arrangement being a de facto financing arrangement, the assessee was entitled to claim depreciation on aircraft. On our perusal of the aircraft lease agreement, and particularly bearing in mind Board Circular No. 9, we are of the view that the assessee's explanation, to the effect that the lease agreement was in the nature of de facto financing arrangement entitling the assessee to depreciation on the aircraft, is not in the category of a fantastic or unacceptable explanation.
The reason of Assessing Officer's rejecting the depreciation claim was that the ownership of the aircraft remained with the lessor company, but the two situations visualized in the CBDT circular, entitling the assessee for depreciation in the cases of hire purchases, are (a) when the ownership is transferred at once and the lessor has the right to sue for instalments but not for recovery of the leased assets; and (b) when the terms of agreement provide that the equipment shall become the property of hirer or confer the hirer an option to purchase the equipment. It is, therefore, obvious that no rights being created in the hands of the assessee-company, in respect of aircraft taken on lease, per se does not disentitle the assessee for depreciation on aircraft.
12. Those two situations, visualized aforesaid Central Board of Direct Taxes circulars, are inherently mutually exclusive conditions and they envisage different treatments for the purpose of depreciation. In the first case, according to the Central Board of Direct Taxes circular, the transaction is required to be computed on entire purchase price as per the agreement. In the second situation, however, the transaction is required to be treated as one of hire purchase and the periodical payment made by the hire is regarded as made up of: (a) consideration for hire, to be allowed as deduction in the assessment; and (b) payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).
The Central Board of Direct Taxes circular has further clarified that the allowance to be made in respect of hire should be different between the agreement amount of the periodic payments under the agreement and initial value, the amount of this allowance being spread evenly over the term of agreement. We may also mention that the Central Board of Direct Taxes has, vide Instruction No. 1079, dated 19-9-1977, directed the field officers to allow depreciation and development rebate on machinery, purchased on hire purchase basis, in terms of the above circular. The Delhi High Court has, in the case of Addl CIT v. General Industries Corporation On a careful examination of the nature of the hire-purchase agreement, it can be said that though it is worded as a hiring agreement which matures into a sale, it can adso be regarded as a sale on instalments. The property passes in such agreements on the payment of the last instalment. However, during the period of hire, the purchaser is also paying the price, so virtually it is a sale on instalments. The circulars of the Central Board of Direct Taxes only serve to overcome a greater difficulty in computing how the various allowances have to be given to the assessee. If the payments towards the hire-purchase are not treated as being capital payments, they will have to be allowed as revenue payments, because the payments are certainly for business purposes and yet, if they are not treated as capital payments, they will necessarily be amounts expended towards the carrying out of the business. On the other hand, if the property passes at the time of the last instalment, then the entire revenue payment will be transformed into a capital payment at that stage. To meet this obvious difficulty, the Central Board of Direct Taxes has issued ciiculars at various times directing that assets purchased on hire-purchase basis should be treated as belonging to the assessee.
13. It is therefore settled position that depreciation is to be allowed on the assets purchased on hire purchase basis which the aircraft lease agreement was, at least prima facie, in substance. It is not material that in terms of the agreement, the lessor had a right to sue for recovery of asset in case of payment defaults by the lessee, and that the ownership in the asset continued to vest in lessor. We are, therefore, of the view that the claim for depreciation on assets purchased, under the aircraft lease agreement was not a claim which can be rejected outright, or which can be said to be mala fide. Even if depreciation was not to be allowed as it was to be viewed as operational lease, in such a situation the lease was to be treated as operating lease and the entire lease rental was to be considered for being allowed as revenue deduction, which could have possibly resulted in an even lower taxable income. It is not normally possible to disallow deduction for depreciation as also for lease rental. For this reason also, the stand of the assessing officer is erroneous.
14. The assessee's claim cannot, therefore, be said to be without any basis. We are not really concerned with whether or not the assessee has accepted the disallowance made by the assessing officer and has not carried it forward in the appeal. What is important for us is that the claim made by the assessee was at least prima facie an acceptable claim, and cannot simply be brushed aside as unacceptable at the threshold itself. This claim may or may not be acceptable in the course of assessment of income but that certainly by itself does not make claim liable to be visited with penalty under Section 271(1)(c) of the Act. The second limb of the related quantum addition is somewhat consequential in nature because once the claim of aircraft being part of assets is to be held in the realm of prima facie acceptable claim, the claim of its being part of capital employed cannot be brushed aside either. The claims made by the assessee, therefore, could not have been reasons enough for imposition of penalty.
15. For the reasons set out above, we are of the considered view that imposition of penalty under Section 271(1)(c) was not warranted on the f act of this case. We may also add that in the present case both the figures, ie., assessed income as also the returned income are negative figures and for that reason also penalty was not leviable. The Hon'ble Supreme court in the case of CIT v. Prithipal Singh & Co.
has affirmed and approved the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Prithipal Singh & Co.
laying down the proposition that penalty under Section 271(1)(c) cannot imposed in case returned income as also the assessed income are negative figures. In the case of CIT v. Oriental Syntax Ltd. (unreported), the revenue has conceded, before the Hon'ble jurisdictional High Court, that this question is now covered by the Hon'ble Supreme Court's decision in the case of Prithipal Singh & Co.
(supra). In this view of the matter, it cannot be open to the revenue to contend that the penalty under Section 271(1)(c) can be imposed in a case where assessed income as also the returned income are negative figures.
16. The impugned penalty under Section 271(1)(c), accordingly, stands deleted. The assessee gets the relief accordingly.
17. In the result, the appeal is allowed. It was so pronounced at the time of conclusion of hearing itself.