Facts of the Case

The assessee company, Morgan Finvest Pvt. Ltd., engaged primarily in investment and financial services activities, filed its return declaring nil income. During scrutiny assessment proceedings, the Assessing Officer observed that the assessee had claimed depreciation amounting to ₹39,52,300 on a property situated at Eastern Avenue, Maharani Bagh, New Delhi, which had been purchased for ₹3.5 crore along with payment of stamp duty and taxes.

Subsequently, within approximately four months of acquisition, the assessee entered into an agreement for sale of the same property for ₹4.5 crore. Upon investigation, the Assessing Officer found that the property was residential in nature and there was no evidence demonstrating that it had ever been utilized for business activities.

Further examination revealed that the assessee had also included the value of land while claiming depreciation, despite the settled legal position that depreciation is not allowable on land.

Consequently, the depreciation claim was disallowed and penalty proceedings under Section 271(1)(c) were initiated.

Issues Involved

  1. Whether depreciation under Section 32 could be claimed on a property not used for business purposes.
  2. Whether inclusion of land cost in the depreciation claim amounted to furnishing inaccurate particulars.
  3. Whether disallowance of depreciation justified imposition of penalty under Section 271(1)(c).
  4. Whether the claim made by the assessee could be regarded as bona fide.

Petitioner’s Arguments (Revenue/CIT)

The Revenue argued that:

  • The property was residential and there was no evidence of business usage.
  • The assessee held the property only for a short duration, indicating intention to earn quick profits instead of business use.
  • Borrowed funds had been utilized for acquisition.
  • Inclusion of land cost in depreciation was contrary to settled law.
  • The claim was not merely incorrect but deliberately false.
  • The Tribunal ignored findings of lower authorities while deleting the penalty.

The Revenue contended that the assessee knowingly furnished inaccurate particulars and therefore penalty under Section 271(1)(c) was rightly imposed.

Respondent’s Arguments (Assessee/Morgan Finvest Pvt. Ltd.)

The assessee submitted that:

  • The property had originally been acquired for business purposes.
  • It was later found commercially unsuitable and therefore sold.
  • Ownership of the property remained with the assessee during the relevant period.
  • The director allegedly used the property for residential purposes connected with business activities.
  • Full disclosure of all material facts had been made.
  • Mere disallowance of depreciation could not automatically justify imposition of penalty.
  • Reliance was placed on judicial precedents including Reliance Petroproducts.

The assessee maintained that the depreciation claim was bona fide.

Court Findings / Court Order

The Delhi High Court held in favour of the Revenue and restored the penalty.

The Court observed:

  • The assessee failed to establish actual use of the property for business purposes as required under Section 32.
  • No documentary evidence existed to prove business usage.
  • Short holding period and use of borrowed funds indicated intention to earn profit through resale.
  • Depreciation had also been wrongly claimed on land, which is legally impermissible.
  • The claim lacked bona fides and constituted furnishing of inaccurate particulars.

The Court distinguished the judgment in Reliance Petroproducts and observed that the present case involved questionable and fundamentally incorrect particulars rather than a mere rejected claim.

Accordingly, the substantial question of law was answered in favour of the Revenue and against the assessee, and the appeal was allowed.

Important Clarification

The Court clarified an important legal principle:

A mere disallowance of a claim does not automatically attract penalty under Section 271(1)(c). However, where the claim itself lacks bona fides and is supported by incorrect or misleading particulars, penalty becomes justified.

The Court also clarified that:

Depreciation cannot be claimed on land because land is not a depreciable asset under the Income Tax Act.

 

Sections Involved

  • Section 32 – Depreciation on Assets
  • Section 271(1)(c) – Penalty for Concealment of Income / Furnishing Inaccurate Particulars
  • Section 143(1)
  • Section 143(2)
  • Section 260A

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:7264-DB/RVE06122012ITA18552010.pdf

  

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