Facts of the Case

The assessee company was engaged in the business of manufacturing chemicals. For Assessment Year 2001-02, it declared a loss and claimed depreciation amounting to Rs. 32,83,710 on its plant and machinery.

The Assessing Officer disallowed the depreciation claim on the ground that no manufacturing activity had been carried on during the relevant previous year. The assessee challenged the disallowance before the Commissioner of Income Tax (Appeals), but the appeal was dismissed. Thereafter, the assessee accepted the disallowance and did not pursue the matter further.

Subsequently, penalty proceedings under Section 271(1)(c) were initiated by the Revenue on the allegation that the assessee had furnished inaccurate particulars by claiming depreciation that was not allowable.

The Assessing Officer and the Commissioner of Income Tax (Appeals) upheld the levy of penalty. However, the Income Tax Appellate Tribunal deleted the penalty, leading the Revenue to file an appeal before the Delhi High Court.

Issues Involved

  1. Whether penalty under Section 271(1)(c) could be imposed merely because the depreciation claim was disallowed.
  2. Whether the assessee had furnished inaccurate particulars of income by claiming depreciation when no manufacturing activity was carried on during the relevant year.
  3. Whether a bona fide and arguable claim could attract penalty under Section 271(1)(c).

Petitioner’s Arguments (Revenue)

  • The assessee had claimed depreciation despite the absence of manufacturing activity during the relevant previous year.
  • Since the depreciation claim was found to be inadmissible and the assessee accepted the disallowance, penalty proceedings were justified.
  • The claim amounted to furnishing inaccurate particulars of income, attracting Section 271(1)(c).

Respondent’s Arguments (Assessee)

  • The assessee contended that there existed a bona fide difference of opinion regarding the allowability of depreciation.
  • The plant and machinery were maintained and kept ready for use with the intention of reviving business operations.
  • Correspondence with prospective customers demonstrated efforts to secure orders and resume manufacturing activities.
  • Therefore, the depreciation claim was made on a plausible interpretation of law and facts, and no concealment or furnishing of inaccurate particulars had occurred.

Court Order / Findings

The Delhi High Court upheld the decision of the Income Tax Appellate Tribunal and dismissed the Revenue’s appeal.

The Court noted that the Tribunal had examined evidence showing that during the relevant year the assessee had corresponded with parties in India and abroad for the supply of chemicals. The Tribunal also relied upon disclosures in the audited accounts indicating that production could not be resumed due to financial constraints, although efforts were being made to restart operations.

The Court referred to the judgment in Capital Bus Service (P) Ltd. v. Commissioner of Income Tax [1980] 123 ITR 404, wherein a liberal interpretation was adopted regarding the expression "used" for the purpose of claiming depreciation. The principle recognized that machinery kept ready for use may, in appropriate circumstances, qualify for depreciation.

Although the Court observed that the question of actual entitlement to depreciation had already attained finality because the assessee accepted the disallowance, it held that the assessee’s claim was nevertheless based on a plausible and arguable view of the law.

The Court concluded that where two views are reasonably possible and the assessee advances a bona fide claim supported by facts, penalty under Section 271(1)(c) cannot be imposed merely because the claim is ultimately rejected.

Accordingly, the Revenue failed to establish that the assessee had furnished inaccurate particulars of income.

Important Clarification

  • Mere rejection or disallowance of a claim does not automatically justify penalty under Section 271(1)(c).
  • A bona fide claim based on a plausible interpretation of law cannot be treated as furnishing inaccurate particulars.
  • Penalty provisions require a clear finding of concealment of income or furnishing of inaccurate particulars.
  • Where an assessee maintains assets ready for business use and advances an arguable claim for depreciation, penalty may not be sustainable even if the claim itself is disallowed.
  • The judgment reinforces the distinction between a wrong claim and a false claim.

Relevant Sections Involved

  • Section 32 – Depreciation
  • Section 271(1)(c) – Penalty for Concealment of Income or Furnishing Inaccurate Particulars
  • Section 260A – Appeal to High Court

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:25003-DB/VJS22092006ITA10812006_124151.pdf 

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