Facts of the Case

The assessee, Oswal Chemical & Fertilisers Ltd., engaged in the business of manufacturing fertilisers, filed its return for Assessment Year 1996-97 declaring a loss. The assessee had shown purchase of plant and machinery worth approximately ₹6.97 crores from M/s Bermaco Industries Ltd. and claimed depreciation on the same.

The assessment was originally completed under Section 143(3) of the Income-tax Act. Subsequently, the Assessing Officer initiated reassessment proceedings under Section 148 on the allegation that the machinery purchase was bogus and that no machinery had actually been supplied by the vendor. The allegation was primarily based upon the statement of Mr. Viren Ahuja of the supplier company and the supplier's proceedings before the Settlement Commission.

The Assessing Officer passed a reassessment order disallowing the depreciation claimed on the machinery.

Aggrieved by the reassessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

Issues Involved

1.      Whether the machinery purchased by the assessee from the supplier was a genuine purchase or a bogus transaction.

2.      Whether depreciation claimed on such machinery could be disallowed merely on the basis of the supplier’s statement and proceedings before the Settlement Commission.

3.      Whether denial of cross-examination and non-supply of relevant documents violated principles of natural justice.

4.      Whether reassessment and consequent disallowance of depreciation were legally sustainable.

Petitioner’s Arguments

• The machinery allegedly purchased from M/s Bermaco Industries Ltd. was never supplied to the assessee.

• The supplier had admitted before the Settlement Commission that the machinery was not supplied.

• The assessee had wrongly claimed depreciation on non-existent assets.

• The reassessment proceedings under Section 148 were justified as income had escaped assessment due to the wrongful depreciation claim.

Respondent’s Arguments

• The machinery was genuinely purchased, transported and installed at its manufacturing plant in Shahjahanpur, Uttar Pradesh.

• The Assessing Officer failed to provide a copy of the statement of Mr. Viren Ahuja relied upon for making the addition.

• No opportunity for cross-examination of Mr. Viren Ahuja was provided despite specific requests.

• Copies of the Settlement Commission proceedings and related material were also not supplied.

• The assessee repeatedly requested physical verification of the machinery and offered inspection of the installed assets.

• Subsequent physical verification conducted during remand proceedings confirmed the existence and installation of the machinery.

Court Findings

The Delhi High Court upheld the orders passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and dismissed the Revenue’s appeal.

The Court noted that:

• During remand proceedings ordered by the CIT(A), the Assessing Officer conducted physical verification of the machinery at the assessee’s factory.

• The remand report confirmed that the machinery and valves were physically present and installed at the plant site.

• Test-check verification revealed that the machinery description substantially matched the records furnished by the assessee.

• The Assessing Officer himself recorded that no discrepancy could be established through physical verification.

• The CIT(A) and the ITAT concurrently recorded findings of fact that the machinery had actually been purchased and installed.

• Such concurrent factual findings did not give rise to any substantial question of law.

Accordingly, the appeal filed by the Revenue was dismissed.

Important Clarification

The High Court made an important observation regarding the reliance placed upon the supplier’s proceedings before the Settlement Commission.

The Court observed that the issue before the Settlement Commission related to the supplier’s alleged wrongful claim of deduction under Section 80IA and not to the actual supply of machinery to the assessee.

Therefore, the supplier’s proceedings before the Settlement Commission could not automatically establish that the machinery purchase by the assessee was bogus.

The Court further noted that the statement of Mr. Viren Ahuja was neither properly produced nor subjected to cross-examination, thereby weakening the Revenue’s reliance on such evidence.

Sections Involved

• Section 143(3) of the Income-tax Act, 1961
• Section 148 of the Income-tax Act, 1961
• Section 250(4) of the Income-tax Act, 1961
• Section 32 of the Income-tax Act, 1961 (Depreciation)
• Section 80IA of the Income-tax Act, 1961

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:1729-DB/MLM23032011ITA10922009.pdf

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