M/s. ULTRAMARINE & PIGMENTS LTD., MUMBAI v. ACIT CIR - 7(3), MUMBAI

ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 1 OF 22 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI F BENCH MUMBAI BEFORE SHRI N V VASUDEVAN AND SHRI PRAMOD KUMAR ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 ULTRAMARINE & PIGMENTS LIMITED .APPELLANT THIRUMALAI HOUSE 101/102 ROAD NO. 29 SION (EAST) 400 022 VS. ASSTT COMMISSIONER OF INCOME TAX - CIRCLE 7 (3) MUMBAI . RESPONDENT A PPELLANT BY : SHRI HIRO RAI RESPONDENT BY : SHRI VIRENDRA OJHA O R D E R PER PRAMOD KUMAR: 1. THE QUESTION THAT WE NE ED TO ADJUDICATE IN THIS APPEAL IS WHETHER OR NOT THE LEARNED COMMISSIONER (APPEALS) WAS CORRECT IN UPHOLDING THE PENALTY OF RS 53 69 892 IMPOSED ON THE ASSESSEE UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT 1961 ( THE ACT IN SHORT) FOR THE ASSESSMENT YEAR 1996 - 97. ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 2 OF 22 2. THE IMPUGNED PENALTY WAS IMPOSED IN RESPECT OF THREE ADDITIONS TO THE INCOME RETURNED BY THE ASSESSEE BUT AS AT THIS STAGE ONLY SURVIVING ADDITION IS FOR DISALLOWANCE OF DEPRECIATION OF RS 1 00 20 400. WE WILL THEREFORE KEEP OUR D ISCUSSIONS CONFINED TO THIS DISALLOWANCE OF DEPRECIATION. 3. THE RELEVANT MATERIAL FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS FOLLOWS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING DETERGENT POWDER BLUE PIGMENTS AND OTHER SUCH CHEMICALS. IN THE RELEVANT PREVIOUS YEAR THE ASSESSEE CLAIMED A DEPRECIATION OF RS 1 00 20 400 BEING ONE HUNDRED PERCENT OF ONE FULLY AUTOMATIC HEATED TUNNEL FURNACE LEASED OUT TO ONE DUCKFIN INTERNATIONAL LIMITED IN MADHYA PRADESH (DUCKFIN IN SHORT) FOR AGGREGATE LEASE VALUE OF RS 1 26 25 680. THIS FURNACE WAS CLAIMED TO HAVE BEEN PURCHASED FROM ONE ASSOCIATED ENGINEERS MADHYA PRADESH (AE IN SHORT) FOR A CONSIDERATION OF RS 1 00 20 400 AND LEASED OUT TO DUCKFIN. WHEN THE ASSESSING OFFICER PUT TH IS CLAIM TO HIS RIGOROUS SCRUTINY HE DID NOT FIND EVERYTHING IN ORDER. DUCKFIN AND AE WERE NOT TRACEABLE AND THE SUMMONS ISSUED TO THEM WERE RETURNED BACK UNDELIVERED BY THE POSTAL AUTHORITIES. WHEN THE ASSESSEE WAS CONFRONTED WITH THIS FACT IT WAS SUBMI TTED BY THE ASSESSEE THAT THE LEASE TRANSACTION WAS ARRANGED THROUGH FIDUCIARY CAPITAL AND FINANCIAL SERVICES LIMITED AND THAT THE ASSESSEE IS NOT IN A POSITION TO GIVE FURTHER DETAILS ABOUT DUCKFIN OR AE. THE ASSESSING OFFICER THEN CONDUCTED ENQUIRIES WI TH THE BANK IN WHICH DUCKFIN WAS MAINTAINING ACCOUNT AND IT WAS LEARNT THAT THE SAID ACCOUNT WAS OPERATED BY ANIL BHARGAVA CMD SUNIL BHARGAVA JT CMD DEEPAK BHARGAVA DIRECTOR FINANCE AND DILIP BHARGAVA. ONE OF THEM I.E. DEEPAK BHARGAVA AS FURTHER INVESTIGATIONS WITH THE BANKER REVEALED WAS ALSO PROPRIETOR OF ASSOCIATED ENGINEERS THE PURPORTED SELLER OF FURNACE. THE COPIES OF BANK ACCOUNT OF AE OBTAINED BY THE ASSESSING OFFICER ALSO REVEALED THAT THE AMOUNT OF RS 1 00 20 400 WHICH WAS RECEIVE D FROM THE ASSESSEE ON 24.11.1995 WAS ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 3 OF 22 TRANSFERRED TO DUCKFIN ON THE VERY NEXT DAY I.E. ON 25.11.1995. ON THIS DAY ITSELF THERE WAS A TRANSFER OF RS 86 67 646 FROM DUCKFIN TO MALVERN TRADING PVT LTD ( MALVERN IN SHORT) WHICH RECEIVED THE MONEY ON BEHALF OF VARDHARAJA CREDIT AND INVESTMENT LIMITED (VCIL) - WHICH IS ADMITTEDLY A COMPANY BELONGING TO THE ASSESSEE S GROUP. OUT OF RS 1 00 20 400 PAID BY THE ASSESSEE THUS RS 86 67 646 WERE RECEIVED BACK WITHIN 3 DAYS BY A COMPANY WHICH IS ADMITTEDLY PAR T OF THE ASSESSEE GROUP. WHEN ASSESSEE WAS CONFRONTED WITH THESE FACTS THE ASSESSEE PLEADED IGNORANCE ABOUT THE WHEREABOUTS OF DUCKFIN ASSOCIATED ENGINEERS AND INSTALLATION OF FURNACE LEASED OUT TO DUCKFIN. IT WAS POINTED OUT THAT THE LEASE ARRANGEME NTS WERE ENTERED INTO THROUGH THE BROKER AND THAT BOTH THE PARTIES I.E. DUCKFIN AS ALSO THE ASSOCIATED ENGINEERS ARE RANK OUTSIDERS SO FAR AS THE ASSESSEE IS CONCERNED. AS FOR THE MONEY BEING ROUTED BACK TO VCIL THE ASSESSEE DID NOT DISPUTE THAT IT IS A GROUP COMPANY AND SUBMITTED THAT THIS AMOUNT REPRESENTED DISCOUNTING OF LEASE PAYMENT LIABILITY OF DUCKFIN BY VCIL. IT WAS ALSO POINTED OUT THAT SINCE LEASE RENTALS WERE TO BE RECEIVED FROM AN OUTSIDER WE THOUGHT IT PRUDENT AND SAFER TO RECEIVE THE LEA SE RENTAL FROM GROUP CONCERN COMPARED TO THAT FROM AN OUTSIDER . THE ASSESSING OFFICER ALSO NOTED THAT ON THE VERY DAY OF ENTERING INTO LEASE WITH DUCKFIN THE ASSESSEE ALSO ENTERED INTO A TRIPARTITE AGREEMENT WITH VCIL SECURING THE PAYMENTS OF LEASE INST ALLMENTS BY DUCKFIN. THE ASSESSING OFFICER FOUND THIS CONDUCT CURIOUS. ON ONE HAND ASSESSEE WAS LEASING OUT ASSET TO A LEASE CUSTOMER AND ON THE SAME DAY IT S OWN SISTER CONCERN IS DISCOUNTING THE REPAYMENT LIABILITIES OF THE SAID LESSEE THUS NULLIFYIN G THE LEASE TRANSACTION. EVEN THIS NULLIFICATION WAS AT A HUGE COST TO THE ASSESSEE GROUP AND THE EXERCISE OF NULLIFICATION ALSO RAISED DOUBTS ON BONAFIDES OF THE ARRANGEMENT. ON THESE FACTS THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS SORT OF CHANGE OF MIND AND IRRATIONAL BEHAVIOUR ON THE PART OF THE ASSESSEE COMPANY CAN LEAD TO ONE CONCLUSION I.E. THE ASSESSEE WAS ONLY KEEN TO AVAIL DEPRECIATION ON A NON EXISTING ASSET AND THAT THEREFORE IT HAS ENTERED INTO A LEASE TRANSACTION AND CLAIMED DEPREC IATION AND SINCE IT KNEW THAT THERE IS NO ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 4 OF 22 ASSET INVOLVED IN THE LEASE TRANSACTION IT HAS ENTERED INTO A TRIPARTITE AGREEMENT JUST TO SECURE ITS OWN MONEY . . THE ASSESSING OFFICER CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND FINALLY CONCLUDED THAT THE LEASE TRANSACTION IS ONLY A BOGUS TRANSACTION AS THE ASSET WAS NEVER PURCHASED FROM ASSOCIATED ENGINEERS RATHER THE MONEY WAS PASSED ON TO THE DUCKFIN INTERNATIONAL LIMITED THE ALLEGED LESSEE THROUGH ITS CONDUIT ASSOCIATED ENGINEERS AND IN A GAP OF TWO TO THREE DAYS THE AMOUNT OF RS 86 67 646 OUT OF THE LEASED AMOUNT OF RS 1 00 20 400 HAS COME BACK TO THE SAME GROUP OF COMPANIES . ONCE IT WAS HELD THAT THE ASSETS NEVER EXISTED AND THAT THE LEASE WAS A BOGUS TRANSACTION DEPRECIATION CLAIMED ON THE FURNACE WHICH WAS CLAIMED TO HAVE BEEN LEASED OUT WAS ALSO DECLINED. AGGRIEVED INTER ALIA BY THIS DISALLOWANCE OF RS 1 00 20 400 ON ACCOUNT OF DEPRECIATION ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE CIT(A ) CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER AND CONCLUDED THAT ONLY A PAPER TRANSACTION WAS CARRIED OUT TO DEFRAUD THE REVENUE . WHEN THE MATTER FINALLY TRAVELLED BEFORE A COORDINATE BENCH OF THIS TRIBUNAL THE ASSESSEE DID NOT PRESS THE GRIEVANCE AGAINST THE SAID DISALLOWANCE. THE DISALLOWANCE OF DEPRECIATION THUS RECEIVED FINALITY. 4. THE MATTER HOWEVER DID NOT REST THERE. 5. ON 27 TH MARCH 2006 THE ASSESSING OFFICER ALSO IMPOSED A PENALTY UNDER SECTION 271(1)(C) OF THE ACT INTER ALIA O N THE GROUND THAT AS PER DETAILED REASONS GIVEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER DATED 30 TH MARCH 1999 AS THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIM WITH CORROBORATING EVIDENCES IT WAS HELD THAT THE DEPRECIATION OF RS 1 00 20 400 WAS CLAIMED ON THE BASIS OF BOGUS INVOICES ISSUED FOR NON EXISTING ASSETS . IT APPEARS THAT NO SUBMISSIONS WERE MADE BY THE ASSESSEE AT THE STAGE OF PENALTY PROCEEDINGS AS IT HAS BEEN NOTED IN THE IMPUGNED ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 5 OF 22 PENALTY ORDER THAT IN RESPONSE TO THE RE MINDERS DATED 9.1.2006 AND 19.1.2006 THE ASSESSEE VIDE LETTER DATED 19.1.2006 HAS REQUESTED TO GIVE TIME FOR ANOTHER 15 DAYS TO REPLY TO THE SAME BUT NO REPLY HAS BEEN RECEIVED FROM THE ASSESSEE TILL TODAY (I.E. 27.3.2006) . IT WAS THUS INFERRED THAT THE ASSESSEE HAS NO VALID EXPLANATION TO OFFER AND ACCORDINGLY MINIMUM PENALTY @ 100% OF TAX SOUGHT TO BE AVOIDED WAS IMPOSED. THE ASSESSEE APPEALED AGAINST THIS PENALTY ORDER BUT ONCE AGAIN WITHOUT ANY SUCCESS. THE CIT(A) CONFIRMED THE IMPUGNED P ENALTY AND INTER ALIA OBSERVED AS FOLLOWS : 27. I HAVE VERY CAREFULLY CONSIDERED THE ABOVE CONTENTIONS OF THE AR. FIRST OF ALL BY CONTENDING THAT THE AMOUNT RECEIVED HAD BOTH CAPITAL AND INTEREST COMPONENT EMBEDDED IN A WAY THE AR HAS ADMITTED THA T THE SO - CALLED LEASE TRANSACTION WAS NOT GENUINE. SECONDLY WHEN THE LEASE TRANSACTION WAS SHAM AND BOGUS HOW CAN IT BE SAID THAT THE IMPUGNED AMOUNT WAS A RETURN OF THE MONEY SO FINANCED? ESPECIALLY WHEN THE ENTIRE TRANSACTIONS HAD NOT BEEN ESTABLI SHED BY THE APPELLANT AS EVEN GENUINE TRANSACTIONS OF ANY KIND BETWEEN THE SAID DUCKFIN AND ITSELF HOW CAN IT CLAIM THAT DUCKFIN HAD RETURNED IN INSTALLMENT THE ORIGINAL AMOUNT? 28. IT MUST BE REMEMBERED THAT DURING THE INVESTIGATION OF THE LEASING TRAN SACTION THE APPELLANT HAD VERY INNOCENTLY CLAIMED THAT IT HAD NO DIRECT KNOWLEDGE OF THE DUCKFIN AND THE SO - CALLED ASSET SUPPLIER. ONLY AN INTERMEDIARY HAD ALLEGEDLY DONE THE TRANSACTION. NOW THE APPELLANT HAD NEVER BOTHERED TO FIND OUT THE SAID PARTY TO PROVE THE GENUINENESS OF ITS CLAIM YET HAD VERY CONVENIENTLY RECEIVED LEASE RENTALS YEAR AFTER YEAR AS ALLEGEDLY AGREE UPON. IT IS SURPRISING AND RATHER HIGHLY INCREDIBLE THAT THE APPELLANT HAD STILL NOT BEEN CONCERNED TO KNOW WHERE FROM AND FROM W HICH BANK ACCOUNT THE SAID SO - CALLED LEASE RENTAL HAD COME TO IT AND WHO IN FACT HAD BEEN THE SIGNATORY IN THE CHEQUES FOR THE SO - CALLED RENTAL! THE PLEA IS ABSURD AND IS LOGICALLY NOT TENABLE. THEREFORE I AM OF THE VIEW THAT THE ENTIRE AMOUNT IN THES E TWO YEARS HAD NO NEXUS WITH THE SO - CALLED LEASE TRANSACTION WHICH HAD BEEN ESTABLISHED BY THE ASSESSING OFFICER AS NON - EXISTENT. THE AMOUNTS WERE PURELY RECEIPTS FOR WHICH THE APPELLANT HAD NO SATISFACTORY EXPLANATION AND HENCE THE ENTIRE AMOUNT HAD B EEN ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 6 OF 22 INCORRECTLY EXPLAINED. NONETHELESS IT IS ONLY OBVIOUS THAT INACCURATE PARTICULARS HAD BEEN FURNISHED WITH REGARD TO THE SAID INCOME. THEREFORE I CONFIRM THE ASSESSING OFFICER S DECISION THAT THE SAID AMOUNT WAS ALSO ONE IN RESPECT OF WHICH THE APPELLANT I AM CONVINCED DESERVES TO BE PENALIZED. 6. THE ASSESSEE IS NOT SATISFIED WITH THE STAND SO TAKEN BY THE LEARNED COMMISSIONER (APPEALS) AND IS IN FURTHER APPEAL BEFORE US. 7. SHRI HIRO RAI LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT T HE ASSESSEE HAS FILED ENOUGH EVIDENCES TO SUPPORT HIS BONAFIDES AND SUBSTANTIATE THE CLAIM OF DEPRECIATION. THE FACT THAT THE ASSESSEE HAS ABANDONED HIS CLAIM FOR DEPRECIATION IS NOT BECAUSE THERE WAS ANY LACK OF BONAFIDES IN THE CONDUCT OF THE ASSESSEE B UT MERELY BECAUSE THE ASSESSEE DID NOT WANT TO PROLONG THE LITIGATION WHICH AT THE END OF THE DAY WAS TAX NEUTRAL SINCE THE TAX AUTHORITIES HAVE TREATED THE LEASE ARRANGEMENT AS A FINANCIAL LEASE AND THUS PROCEEDED TO TAX ONLY INTEREST ELEMENT IN THE LE ASE RENTAL AS AGAINST THE ENTIRE LEASE RENTAL ITSELF AS ASSESSEE S INCOME. IT IS SUBMITTED THAT LOSS DUE TO DENIAL OF DEPRECIATION IS THUS OFFSET BY REDUCTION IN TAX LIABILITY ON ACCOUNT OF LEASE RENTALS. HE INVITES OUR ATTENTION TO THE INVOICE ISSUED B Y ASSOCIATED ENGINEERS A COPY OF WHICH WAS PLACED BEFORE US AT PAGE 91 OF THE PAPER BOOK WHICH ESTABLISHES THAT THE FURNACE WAS PURCHASED BY THE ASSESSEE. A REFERENCE IS THEN MADE TO THE DELIVERY CHALLAN DATED 15 TH SEPTEMBER 1995 CONFIRMING THAT THE FUR NACE WAS DELIVERED TO DUCKFIN. OUR ATTENTION IS ALSO INVITED TO THE CERTIFICATE DATED 28 TH SEPTEMBER 1995 ISSUED BY KANTI GANDHI & ASSOCIATES CHARTERED ACCOUNTANTS BHOPAL CONFIRMING THAT THE FURNACE IN QUESTION WAS DULY INSTALLED AND COMMISSIONED AT T HE FACTORY PREMISES OF DUCKFIN. ALL THIS ACCORDING TO THE LEARNED COUNSEL ESTABLISHES THAT THE BONAFIDES OF THE LEASE ENTERED INTO BY THE ASSESSEE AND THAT AT THE MINIMUM ASSESSEE HAD GOOD REASONS TO BELIEVE THAT ASSET ON WHICH DEPRECIATION WAS CLAIMED DID EXIST. OUR ATTENTION WAS ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 7 OF 22 ALSO INVITED TO THE LETTER DATED 9 TH FEBRUARY 1999 FROM THE ASSESSEE ADDRESSED TO THE ASSESSING OFFICER WHICH INTER ALIA URGED THE ASSESSING OFFICER TO SUMMON THE BROKER THROUGH WHOM THE LEASE WAS ARRANGED. IT WAS ALSO PO INTED OUT THAT THE ASSESSEE HAD DULY OBTAINED SIGNATURE VERIFICATION OF DUCKFIN FROM THE STATE BANK OF INDIA AND AS SUCH ASSESSEE WAS OF THE GENUINE BELIEF THAT DUCKFIN WAS A GENUINE BUSINESS CONCERN. LEARNED COUNSEL ALSO INVITED OUR ATTENTION TO THE LEASE AGREEMENT WHICH WAS FILED BEFORE THE ASSESSING OFFICER. ON THE STRENGTH OF THESE SUBMISSIONS IT IS CONTENDED THAT THE ASSESSEE HAD DONE EVERYTHING AT HIS COMMAND TO ESTABLISH BONAFIDES OF THE LEASE TRANSACTIONS AND THEREFORE IRRESPECTIVE OF WHATEVER V IEW HAS BEEN ACCEPTED IN THE QUANTUM PROCEEDINGS IT CANNOT BE SAID THAT THE ASSESSEE HAS FAILED TO GIVE A REASONABLE EXPLANATION WITH REGARD TO THE CLAIM OF DEPRECIATION. OUR ATTENTION IS ALSO INVITED TO EXPLANATION 1 TO SECTION 271(1)(C) IN SUPPORT OF TH E PROPOSITION THAT UNLESS THE ASSESSEE DOES NOT GIVE A REASONABLE EXPLANATION OR UNLESS THE EXPLANATION SO GIVEN IS PROVED TO BE FALSE PENALTY UNDER SECTION 271(1)(C) CANNOT BE IMPOSED. LEARNED COUNSEL RELIES UPON DECISION OF A COORDINATE BENCH IN THE C ASE OF KANBAY SOFTWARE INDIA PVT LTD VS DCIT 1 AND SUBMITS THAT IN VIEW OF THE LEGAL POSITION AS SUMMED UP THEREIN IT IS NOT A FIT CASE FOR IMPOSITION OF PENALTY UNDER SECTION 271(1)(C). LEARNED COUNSEL SUBMITS THAT IT IS NOT A CASE IN WHICH THE STAND OF THE ASSESSEE HAS BEEN PROVED TO BE FALSE AS THE ASSESSING OFFICER HIMSELF IN THE IMPUGNED PENALTY ORDER OBSERVES THAT THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE CLAIM . IT IS THUS A SITUATION IN WHICH THE TRANSACTION HAS NOT BEEN PROVED BY THE A SSESSEE BUT IT HAS NOT BEE DISPROVED EITHER. NO ELEMENT OF FALSITY IS ESTABLISHED BY THE ASSESSING OFFICER AND ALL THE REASONABLE REQUISITIONS OF THE ASSESSING OFFICER HAVE BEEN DULY COMPLIED WITH. LEARNED COUNSEL TAKES US THROUGH THE ASSESSMENT ORDER W ITH A VIEW TO HIGHLIGHT THAT AT ONE PLACE THE ASSESSING OFFICER HAS USED THE EXPRESSION AFTER INVESTIGATIONS WITH DUCKFIN WHICH ESTABLISHES THAT DUCKFIN DID EXIST AT SOME POINT OF TIME AND THE INVESTIGATIONS WERE CARRIED 1 122 TTJ 721 ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 8 OF 22 OUT THERE AS WELL. ACCORDING TO THE LEARNED COUNSEL IT IS NOT A CASE OF CONCEALING AN INCOME OR OF FURNISHING INACCURATE PARTICULARS OF INCOME. IT IS A CASE IN WHICH A CLAIM IS MADE WHICH EVEN AS PER THE ASSESSING OFFICER COULD NOT BE SUBSTANTIATED. MERE MAKING OF AN INCORRECT CLAIM AS IS THE SETTLED LEGAL POSITION IN VIEW OF HON BLE SUPREME COURT S JUDGMENT IN THE CASE OF CIT VS RELIANCE PETROPRODUCTS LIMITED 2 COULD NOT BE VISITED WITH PENAL CONSEQUENCES UNDER SECTION 271(1)(C) OF THE ACT. IT IS ALSO SUBMITTED THAT THE ASSESSEE S T AXABLE INCOME AFTER THE APPEAL EFFECT HAVING BEEN GRANTED IS RS 49.40 LAKHS AND TO SAVE TAX ON THIS INCOME IT WOULD NOT MAKE ANY SENSE TO CLAIM BOGUS DEPRECIATION OF RS 1 CRORE. IT IS FURTHER SUBMITTED THAT THE ASSESSEE IS INFACT AN INNOCENT VICTIM O F A FRAUD PERPETRATED ON IT AS WAS THE CASE BEFORE A COORDINATE BENCH ON MATERIALLY IDENTICAL FACTS IN THE CASE OF BPL SANYO FINANCE LIMITED VS DCIT 3 .IT IS ALSO POINTED OUT THAT DESPITE ASSESSEE S SPECIFIC REQUESTS THE BROKER THROUGH WHOM THE LEASE TRANSACTION WAS ARRANGED AND WHO COULD HAVE GIVEN ALL THE DETAILS WAS NEVER SUMMONED BY THE ASSESSING OFFICER. LEARNED COUNSEL THUS SUBMITS THAT THE ASSESSEE IS AN INNOCENT VICTIM AND THE RIGHT COURSE OF ACTION FOR THE INCOME TAX AUTHORITIES SHOULD HAVE B EEN TO CATCH HOLD OF PERPETRATORS OF THIS FRAUD RATHER THAN PUNISHING THE VICTIM. LEARNED COUNSEL ONCE AGAIN SUBMITS THAT IN ANY EVENT THERE IS NO CONCEALMENT AT ALL; IT S ONLY A TIMING ISSUE IN THE SENSE THAT THE YEAR OF TAXABILITY IS SHIFTED RATHER TH AN A NEW INCOME BEING BROUGHT TO TAX. HE SUBMITS THAT IN ALL THE INCOME TAX RETURNS FILED BY THE ASSESSEE GROSS LEASE RENTALS WERE SHOWN AS INCOME WHEREAS NOW ONLY INTEREST COMPONENT OF LEASE RENTAL IS BEING BROUGHT TO TAX. THE NET RESULT IS THAT WHILE IN COME IS BEING INCREASED IN THE YEAR 1 DUE TO DISALLOWANCE OF DEPRECIATION INCOME IS BEING DECREASED IN YEAR 1 TO 5 DUE TO PRINCIPAL AMOUNT COMPONENT IN LEASE RENTAL BEING TAKEN OUT OF THE AMBIT OF TAXABLE INCOME. OUR ATTENTION IS INVITED TO DETAILED COM PUTATIONS SUBSTANTIATING THIS CLAIM AT PAGE 96 OF THE PAPERBOOK. IT IS THEN SUBMITTED THAT IN VIEW OF 2 322 ITR 158 3 290 ITR AT 80 ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 9 OF 22 HON BLE BOMBAY HIGH COURT S JUDGMENT IN THE CASE OF CIT VS HIND RAJASTHAN CONSTRUCTION CO. 4 MERELY BECAUSE INCOME OF ONE YEAR IS SHIFTED TO ANOTHER YEA R PENALTY UNDER SECTION 271(1)(C) CANNOT BE IMPOSED. LEARNED COUNSEL ALSO INVITED OUR ATTENTION TO THE RETURNED INCOMES OF THE ASSESSEE FOR THE ASSESSMENT YEARS 1997 - 98 ONWARDS WHICH WERE RS 1.68 CRORES RS 2.69 CRORES RS 4.24 CRORES. RS 4.72 CRORES AND RS 3.35 CRORES RESPECTIVELY AND SUBMITTED THAT THIS QUANTUM OF RETURNED INCOME DEMONSTRATES THE BONAFIDES OF THE ASSESSEE AND THAT NO USEFUL PURPOSE COULD BE SERVED BY ASSESSEE S RESORTING TO UNETHICAL MANEUVERING . WITHOUT PREJUDICE TO THESE ARGUMENTS AND TO LEARNED COUNSEL S SUBMISSION THAT IT WAS NOT A FIT CASE FOR IMPOSITION OF PENALTY AT ALL IT IS ALSO CONTENDED THAT IN ANY EVENT WHAT IS TAX SOUGHT TO BE EVADED MUST BE COMPUTED ON THE BASIS OF NET REVENUE LOSS I.E. AFTER TAKING INTO TAXABLE INCOMES AS A RESULT OF THE ALLEGED BOGUS LEASE TRANSACTION AS A WHOLE. IT IS ALSO POINTED OUT THAT THE PENALTY WAS IMPOSED IN RESPECT OF THREE QUANTUM ADDITIONS OUT OF WHICH THE REMAINING TWO I.E. OTHER THAN DEPRECIATIONS DISALLOWED HAVE ALREADY BEEN DELETED I N APPEAL. THE QUANTUM OF PENALTY IS TO BE MODIFIED EVEN IF THE PENALTY IS CONFIRMED IN PRINCIPLE. WE ARE THUS URGED TO VACATE OR AT LEAST MODIFY THE IMPUGNED PENALTY ORDER ON THE ABOVE LINES. 8. SHRI OJHA LEARNED DEPARTMENTAL REPRESENTATIVE TOOK U S THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND JUSTIFIED THE SAME. IT WAS SUBMITTED THAT THE ALLEGED LEASE TRANSACTIONS AS EVIDENT FROM THE UNCONTROVERTED MATERIAL ON RECORD WAS CLEARLY A BOGUS TRANSACTION FOR CLAIMING DEPRECIATION @ 100% ON CERTAIN A SSETS WHICH NEVER EXISTED. IT WAS SUBMITTED THAT THE TRANSACTION BEING IN THE NATURE OF FINANCE LEASE OR OPERATING LEASE WAS WHOLLY IRRELEVANT AS IT WAS A BOGUS TRANSACTION WITH NO COMMERCIAL MOTIVES. IT WAS POINTED OUT THAT THE CIT(A) HAS GIVEN FINDING T O THIS EFFECT AND THIS FINDING HAS REACHED 4 116 ITR 304 ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 10 OF 22 FINALITY. IN SUCH A SITUATION THE ASSESSEE WAS CLEARLY AT FAULT IN MAKING A FRAUDULENT DEPRECIATION CLAIM. THE FINDINGS OF THE AUTHORITIES BELOW ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE CLEARLY ESTA BLISH THIS ASPECT OF THE MATTER. IT WAS ALSO SUBMITTED THAT THE PURPORTED MANUFACTURER OF THE MACHINERY HAS ALREADY ACCEPTED THAT THE SAID CONCERN WAS IN THE BUSINESS OF ISSUING BOGUS BILLS. ALL THESE FACTS TAKEN TOGETHER ACCORDING TO THE LEARNED COUNSEL MAKE IT A FIT CASE FOR CONFIRMING THE IMPUGNED CONCEALMENT PENALTY. THE ASSESSEE HAS NOT FURNISHED TRUE PARTICULARS AND HAS CONCEALED INCOME BY MAKING A FALSE CLAIM OF DEPRECIATION. WE ARE THUS URGED TO CONFIRM THE IMPUGNED PENALTY. 9. IN REJOINDER SH RI RAI SUBMITTED THAT THERE IS NOTHING ON THE RECORD TO EVEN SUGGEST THAT ASSOCIATED ENGINEERS HAS EVER STATED THAT THEY ARE IN THE BUSINESS OF ISSUING BOGUS BILLS AND AS A MATTER OF FACT THE CASE OF THE REVENUE HAS BEEN THAT THEY ARE NOT ABLE TO TRACE THE SAID CONCERN. LEARNED COUNSEL ONCE AGAIN REITERATED HIS SUBMISSIONS AND URGED US TO DELETE THE IMPUGNED PENALTY. 10. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 11. IT IS NECESSARY TO UNDERSTAND THE NATURE OF TRANSACTION THAT THE ASSESSEE HAS ENTERED INTO BEFORE WE ADDRESS OURSELVES TO THE QUESTION WHETHER IT IS A FIT CASE FOR IMPOSITION OF PENALTY OR NOT. TH E ASSESSEE IS A MANUFACTURER OF CERTAIN DETERGENT PIGMENTS AND OTHER CHEMICALS. IT HAS ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 11 OF 22 NOTHING TO DO WITH ANY LEASING OR FINANCING BUSINESS IN THE NORMAL COURSE OF BUSINESS. IN THIS YEAR THE ASSESSEE ENTERS INTO A LEASE TRANSACTION WITH WHAT THE ASSESSE E TERMS AS AN UNRELATED PARTY . UNDER THE LEASE ARRANGEMENT THE ASSESSEE WAS TO BUY CERTAIN EQUIPMENT FOR RS 1.02 CRORES AND GIVE IT ON LEASE TO DUCKFIN FOR LEASE RENTALS AGGREGATING TO RS 1.26 CRORES. ASSUMING THAT IT WAS A COMMERCIAL ARRANGEMENT THE GAIN THAT THE ASSESSEE WOULD HAVE HAD IN SUCH A SITUATION WOULD HAVE BEEN RS 24 LAKHS PLUS EQUIPMENT S RESIDUAL VALUE IF ANY. THE ASSESSEE NOW PROCEEDS ON THE BASIS THAT IT WAS A FINANCIAL LEASE WHICH IMPLIES THAT THE ASSESSEE WAS TO GET RS 24 LAKHS FOR TIME VALUE OF MONEY USED BY DUCKFIN. IN REALITY HOWEVER DUCKFIN DID NOT USE THE FUNDS SO BORROWED AT ALL. ON THE CONTRARY DUCKFIN EFFECTIVELY PREPAID ALL THE LEASE INSTALMENTS AT NET PRESENT VALUE TO ASSESSEE S SISTER CONCERN VCIL BY GETTING THE SAME D ISCOUNTED FOR RS 86 67 646. IF DUCKFIN WAS TO USE THE BORROWED FUNDS IT WOULD HAVE PAID RS 24 LAKHS AS INTEREST BUT WHEN DUCKFIN DECIDES TO PREPAY THE LOAN BY GETTING IT DISCOUNTED ON NPV THROUGH ASSESSEE S UNDISPUTED SISTER CONCERN DUCKFIN GETS DISCOU NTING OF RS 40 LAKHS. THIS CIRCULAR TRANSACTION HAS RESULTED IN A RS 15 LAKHS PLUS LOSS BY LENDING RS 102 LAKHS TO DUCKFIN FOR 3 DAYS. THE ASSESSEE HAS SOUGHT TO JUSTIFY THE VCIL BEING ROPED IN ON THE GROUND THAT THE ASSESSEE COULD NOT TRUST A STRANGER AND THEREFORE THE ASSESSEE PREFERRED A GUARANTEE BY A KNOWN CONCERN. THIS EXPLANATION IS WHOLLY UNACCEPTABLE. VCIL IS NOT AN OUTSIDE PARTY AND IS ADMITTEDLY A GROUP CONCERN. WHEN ALL THE TRANSACTIONS ARE VIEWED TOGETHER AS WE HAVE SEEN ABOVE THIS MEANS A NET LOSS OF RS 16 LAKHS TO THE ASSESSEE GROUP AND THIS IS NOT AN UNEXPECTED LOSS. THE TRIPARTITE AGREEMENT AS ASSESSING OFFICER HAS CLEARLY NOTED WAS ENTERED ON THE DAY OF LEASE ITSELF AND THUS THE ENTIRE PICTURE OF NET LOSS TO THE GROUP WAS KNOWN AT TH E TIME OF ENTERING INTO THE AGREEMENT ITSELF. IT IS DIFFICULT TO BELIEVE THAT ANY PERSON HIS SENSES WOULD THINK OF GIVING AWAY RS 15 LAKHS PLUS TO A RANK OUTSIDER AND IN ADDITION EXTEND THE FINANCE OF RS 102 LAKHS FOR A PERIOD OF A FEW DAYS. IN CASE WE ARE TO LOOK AT THIS TRANSACTION IN A DIAGRAM FORM THE NET ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 12 OF 22 RESULT OF THIS TRIPARTITE TRANSACTION WHICH IS ENTERED INTO ON ONE DAY AND HAS TO BE NECESSARILY VIEWED AS A COMPOSITE TRANSACTIONS WILL BE AS FOLLOWS : ASSESSEE GROUP DUCKFIN GROUP (THE FA CT THAT ASSESSEE AND VCIF ARE GROUP (ASSOCIATED ENGINEERS IS OWNED BY COMPANIES ARE NOT IN DISPUTE) ONE OF THE DIRECTORS OF DUCKFIN UNCONTROVERTED FINDING OF THE AO) 24.11.95 - THE ASSESSEE ASSOCIATED ENGINEERS PAYS RS 1.02 CROES TO ON 25.11.95 PAYS RS 1.02 CRORES TO ALL DUE LEASE INSTALMENTS PAID BY VARDHARAJA CREDIT (A GROUP COMPANY) TO THE ASSESSEE VARDHARAJA CREDIT INVESTMENTS LTD DUCK FIN INTERNATIONAL LTD RECEIVES RS 86.67 LAKHS ON 25.11.95 PAYS RS 86.67 LAKHS ON 25.11.95 TO MELVERN TRADING PVT LTD AS PER ASSESSEE ITSELF ADMITTEDLY UNDER INSTRUCTIONS FROM AND TO THE CREDIT OF VARDHARAJA CREDIT AND INVESTMENTS 12. WITH THE BENEFIT OF THE ABOVE ANALYSIS WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO MERIT IN ASSESSEE S CONTENTION THAT THE LEASE TRANSACTION WAS A BONAFIDE TRANSACTION AND THEREFORE EVEN THOUGH THE ASSESSEE MAY NOT HAVE PURSUED THE CLAIM IN APPEAL THE ASSESSEE HAD A STRONG CASE ON MERITS. WE HAVE NOTED THAT THE ASSESSING OFFICER HAS DONE A GOOD JOB IN FOLLOWING THE MONEY TRAIL BY OBTAINING AND METICULOUSLY EXAMINING BANK STATEMENTS OF VARIOUS CONCERNS INVOLVED IN THIS COMPLEX TRANSACTIONS AND BUT FOR THE GROUND WORK DONE BY HIM ACTUAL RELEVANT FACTS WOULD NOT HAVE COME INTO LIGHT. WITH ALL THESE FACTS PLACED ON RECORD IT IS NOT AT ALL DIFFICULT TO HOLD THAT THE ASSESSEE DID ACTUALLY ENTER INTO AN ARTIFICIAL ARRANGEMENT TO EVADE HIS TAX ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 13 OF 22 LIABILITY FOR THE ASSESSMENT YEAR BEFORE US. WITH THE HELP OF CLAIMING THIS DEDUCTION FOR DEPRECIATION OF RS 102 LAKHS THE ASSESSEE HA D RETURNED NIL INCOME AND THUS EVADED TAX ON HIS ACTUAL INCOME. AS REGARDS THE ASSESSEE S CLAIM THAT IT WAS A CASE OF FINANCIAL LEASE AND NOT OPERATIONAL LEASE WE ARE OF THE VIEW THAT ONCE CIT(A) HOLDS THAT THIS WAS AN ENTIRELY BOGUS TRANSACTION AND T HAT FINDINGS REMAIN UNCONTESTED IT CANNOT BE OPEN TO THE ASSESSEE TO NOW CONTEND THAT IT WAS A FINANCIAL LEASE. IN ANY EVENT AND PARTICULARLY HAVING NOTED THE MONEY TRAIL AS ABOVE WE SHARE LEARNED CIT(A) S PERCEPTION. WE ARE NOT PERSUADED BY ASSESSEE S SUBMISSION THAT IT WAS A GENUINE LEASING TRANSACTION. 13. WE ALSO SEE NO MERITS IN ASSESSEE S PLEA THAT THERE IS NO CONCEALMENT OF INCOME AT ALL IN THE SENSE THAT WHOLE TRANSACTION IS TAX NEUTRAL OVER A PERIOD OF TIME AND IN VIEW OF HON BLE BOMBAY HIGH COURT S JUDGMENT IN THE CASE OF HIND RAJASTHAN CONSTRUCTION CO 5 IT IS NOT A FIT CASE FOR IMPOSITION OF PENALTY. IN THE CASE OF HIND RAJASTHAN CONSTRUCTION CO HON BLE BOMBAY HIGH COURT WERE IN SEISIN OF A SITUATION IN WHICH TRIBUNAL HAD GIVEN A CATEGORI CAL FINDING TO THE EFFECT THAT THE SHIFTING OF INCOME FROM ONE ASSESSMENT YEAR TO ANOTHER ASSESSMENT YEAR WAS DUE TO A ACCOUNTING POLICY WHICH WAS IN NO WAY NO WAY MALAFIDE OR A DEVICE FOR SHOWING LOWER PROFITS THAN SHOWABLE CONSISTENTLY FOLLOWED BY T HE ASSESSEE OVER THE YEARS AND THIS FACT ESTABLISHED ASSESSEE S BONAFIDES. THE TRIBUNAL HELD THAT ON THESE FACTS THE ASSESSEE HAS DISCHARGED ONUS CAST UPON HIM BY EXPLANATION TO SECTION 271(1)(C). IT WAS IN THIS BACKDROP THAT HON BLE BOMBAY HIGH COURT O BSERVED THAT IT IS DIFFICULT TO FIND FAULT WITH THE THOROUGH APPROACH OF THE TRIBUNAL AND DECLINED THE REFERENCE. THIS DECISION IN OUR HUMBLE UNDERSTANDING DOES NOT HELP THE ASSESSEE PARTICULARLY AS NEITHER THE CONDUCT OF THE ASSESSEE IS BONAFIDES NO R IS THE LEASE ARRANGEMENT IN QUESTION ANYTHING OTHER THAN A DEVICE TO REDUCE THE TAXABLE INCOME OF THE ASSESSMENT 5 SUPRA ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 14 OF 22 YEAR BEFORE US. EVEN THIS CONCEPT OF TAX NEUTRALITY OVER A PERIOD OF TIME IS FALLACIOUS INASMUCH AS WHAT IS TO BE REALLY SEEN IS WHETHER I NCOME OF AN YEAR HAS BEEN TAXED IN THAT PARTICULAR YEAR OR NOT AND MERELY BECAUSE A WRONG DEDUCTION IS ONE YEAR IN OFFSET BY A CORRESPONDING INCOME IN A LATER YEAR IT CANNOT BE SAID THAT SUCH A DEDUCTION DID RESULT IN CONCEALMENT OF INCOME QUA THAT ASSES SMENT YEAR. 14. WE MAY NOW TAKE UP ASSESSEE S RELIANCE ON SIGNATURE VERIFICATIONS THE COPIES OF INVOICE OF FURNACE DELIVERY CHALLAN OF FURNACE AND CHARTERED ACCOUNTANT CERTIFICATE CERTIFYING INSTALLATION AND COMMISSIONING OF FURNACE. AS REGARDS LEARNE D COUNSEL S REFERENCES TO SIGNATURE VERIFICATIONS BY BANKERS THESE SIGNATURE VERIFICATIONS BY NO STRETCH OF LOGIC CANNOT BE SEEN AS REASONABLE EVIDENCE OF GENUINENESS OF A BUSINESS CONCERN BUT SUCH A SIGNATURE VERIFICATION ARE AT BEST SHOW THAT THE SAI D BUSINESS CONCERN WHATEVER BE ITS WORTH HAS A BANK ACCOUNT AND CERTIFIES THE SIGNATURES OF THE SIGNATORY. JUST BECAUSE A PERSON HAS A BANK ACCOUNT IS HARDLY SUFFICIENT TO ESTABLISH HIS BONAFIDES. WE HAVE NOTED THAT THE INVOICE FOR AN AMOUNT OF RS 1.02 CRORES IS ISSUED ON AN INVOICE FORM WHICH IS NOT EVEN SERIALLY NUMBERED AND WHICH HAS A TELEPHONE NUMBER CONTACT AS PP NUMBER. THE SAME IS THE POSITION ABOUT THE DELIVERY CHALLANS. WE ARE EXAMINING CASE OF A VENDOR WHO HAS SOLD A SINGLE MACHINE FOR RS 1.0 2 CRORES AND HE DOES NOT EVEN HAVE SERIALLY NUMBERED INVOICES AND DELIVERY CHALLANS OR EVEN AN INDEPENDENT TELEPHONE CONNECTION. THIS PERSON IS A RANK OUTSIDER AND THE PERSON TO WHOM THE ASSET IS BEING DELIVERED IS ALSO A RANK OUTSIDER. YET ASSESSEE WANT S TO TRUST HIM WITH AN ORDER OF RS 1.02 CRORE WORTH OF MACHINE. AS LATER INVESTIGATIONS REVEALED THE BANK STATEMENT OF THE VENDOR ESTABLISHED THAT HE WAS MERELY A CONDUIT FOR TRANSFER OF MONEY TO DUCKFIN AND EVENTUALLY TO A GROUP COMPANY OF THE ASSESSEE. THIS IS COUPLED WITH THE FACT THAT THESE DOCUMENTS ARE IN CONNECTION WITH A TRIPARTITE TRANSACTION IN WHICH ASSESSEE GROUP LOSES RS 15 LAKHS PLUS ON A 3 DAYS FINANCING OF RS 102 LAKHS. AS FOR ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 15 OF 22 THE CHARTERED ACCOUNTANT CERTIFICATE SAID TO HAVE BEEN RELIED UPON BY THE ASSESSEE IT HAS ALSO BEEN OBTAINED BY THE ALLEGED VENDOR OF NON EXISTENT MACHINERY AND A LESSEE WHOSE CONDUCT HAS NOT BEEN TO PUT IT VERY MILDLY ABOVE BOARD AND WHICH INSPIRES LITTLE CONFIDENCE. THE CHARTERED ACCOUNTANT CERTIFICATE OBTAINE D OR ORGANIZED BY THESE PERSONS OF SUBSTANDARD MORALITY PARTICULARLY WITHOUT EVEN AN EFFORT OF DIRECT OR INDEPENDENT VERIFICATION BY THE ASSESSEE COULD NOT HAVE BEEN SUFFICIENT FOR THE ASSESSEE TO BELIEVE THAT THE MACHINERY ACTUALLY EXISTED AT SITE UNL ESS OF COURSE THE ASSESSEE ITSELF WAS A WILLING PARTY TO THIS COMPLEX MANEUVERING TO REDUCE THE TAX LIABILITY FOR THE ASSESSMENT YEAR BEFORE US. THE QUESTION THAT WE NEED TO CONSIDER IS WHETHER SUCH AN EXPLANATION GIVEN BY THE ASSESSEE CAN BE ACCEPTED . 15. IN THE CASE OF CIT VS NATHULAL AGARWAL & SONS 6 FULL BENCH OF HON BLE PATNA HIGH COURT HAS OBSERVED AS FOLLOWS: AS TO THE NATURE OF EXPLANATION OFFERED BY THE ASSESSEE IT SEEMS PLAIN ON PRINCIPLE THAT IT IS NOT THE LAW THAT THE MOMENT ANY FANTAS TIC OR UNACCEPTABLE EXPLANATION IS GIVEN THE BURDEN PLACED ON HIM WILL BE DISCHARGED AND PRESUMPTION REBUTTED. IT IS NOT THE LAW AND PERHAPS HARDLY CAN BE THAT ANY AND EVERY EXPLANATION OF THE ASSESSEE MUST BE ACCEPTED. IN MY VIEW THE EXPLANATION OF TH E ASSESSEE FOR AVOIDANCE OF PENALTY MUST BE AN ACCEPTABLE EXPLANATION. HE MAY NOT PROVE WHAT HE ASSERTS TO THE HILT POSITIVELY BUT AT LEAST MATERIAL BROUGHT ON RECORD MUST SHOW THAT WHAT HE SAYS IS REASONABLY VALID 16. THE ABOVE VIEWS WERE APPROVED BY THE HON BLE SUPREME COURT IN THE CASE OF MUSSADILAL RAMBHAROSE VS CIT 7 REFERRING THE JUDGMENT OF HON BLE PATNA HIGH COURT THEIR LORDSHIPS HAVE OBSERVED AS FOLLOWS: 6 143 ITR 292 7 165 ITR 14 ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 16 OF 22 THE PATNA HIGH COURT EMPHASIZED THAT AS TO THE NATURE OF EXPLANATION TO BE RENDERED BY T HE ASSESSEE IT WAS PLAIN ON PRINCIPLE THAT IT IS NOT THE LAW THAT THE MOMENT ANY FANTASTIC OR UNACCEPTABLE EXPLANATION IS GIVEN THE BURDEN PLACED ON HIM WILL BE DISCHARGED AND PRESUMPTION REBUTTED. WE AGREE. WE FURTHER AGREE THAT IT IS NOT THE LAW THAT EACH AND EVERY EXPLANATION BY THE ASSESSEE MUST BE ACCEPTED. IT MUST BE ACCEPTABLE EXPLANATION ACCEPTABLE TO A FACT FINDING BODY . 17. VIEWED IN THIS PERSPECTIVE JUST BECAUSE ASSESSEE HAS AN EXPLANATION WHATEVER BE ITS WORTH AND CREDIBILITY IT DOES NOT CEASE TO BE A CASE IN WHICH CONCEALMENT PENALTY IS TO BE LEVIED. IN OUR CONSIDERED VIEW AND BEARING INTO MIND ENTIRETY OF THE CASE THE EXPLANATION OF THE ASSESSEE DOES NOT MERIT ACCEPTANCE. THE LEASE IN QUESTION WAS A SHAM TRANSACTION AS HAS BEEN THE UNCONTROVERTED AND UNCHALLENGED FINDING OF THE CIT(A) AND RIGHT FROM INCEPTION AS EVIDENT FROM THE TRIPARTITE ARRANGEMENT AS WELL THE TRANSACTION DID NOT HAVE ANY COMMERCIAL MOTIVE. IT IS ALSO DIFFICULT TO BELIEVE THAT THE ASSESSEE DID NOT KNOW THE TRUE NATURE OF THE TRANSACTION AND WAS OF THE BONAFIDE BELIEF THAT LEASED ASSETS DID EXIST. WE ARE UNABLE TO SHARE THAT PERCEPTION OF THE ASSESSEE. AS HAS BEEN HELD BY THE HON BLE SUPREME COURT IN THE CASE OF CIT VS DURGA PRASAD MORE 8 THE TAXING AUTHORI TIES ARE NOT REQUIRED TO PUT BLINKERS WHILE LOOKING AT THE DOCUMENTS PRODUCED BEFORE THEM AND THAT THEY ARE ENTITLED TO LOOK ARE ENTITLED TO LOOK INTO THE SURROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY OF RECITALS MADE IN THOSE DOCUMENTS . THEIR LORD SHIPS FURTHER OBSERVED THAT THAT SCIENCE HAS NOT YET INVENTED ANY INSTRUMENT TO TEST THE RELIABILITY OF EVIDENCE PLACED BEFORE A COURT OR TRIBUNAL AND THEREFORE THE COURTS AND TRIBUNALS HAVE TO JUDGE THE EVIDENCE BEFORE THEM BY APPLYING THE TEST OF HUMAN PROBABILITIES. IN OUR CONSIDERED VIEW IT IS CONTRARY TO HUMAN PROBABILITIES THAT MERELY IN VIEW OF INVOICE AND DELIVERY CHALLAN ISSUED BY THE VENDOR AND CHARTERED ACCOUNTANT CERTIFICATE FURNISHED BY THE LESSEE AND DISREGARDING THE TRUE NATURE OF 8 ( 82 ITR 540) ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 17 OF 22 TRANS ACTION THE ASSESSEE GENUINELY BELIEVED THAT THE LEASED ASSETS DID EXIST. WE REJECT THIS EXPLANATION. 18. AS REGARDS LEARNED COUNSEL S RELIANCE ON HON BLE SUPREME COURT JUDGMENT IN THE CASE OF RELIANCE PETROPRODUCTS 9 WE HAVE NOTICED THAT IT WAS A CASE IN WHICH THEIR LORDSHIPS WERE ONLY CONCERNED WITH THE QUESTION WHETHER IN THIS CASE AS A MATTER OF FACT THE ASSESSEE HAS GIVEN INACCURATE PARTICULARS . THEIR LORDSHIPS NOTED THAT IN THIS CASE THERE IS NO FINDING THAT ANY DETAILS SUPPLIED BY THE ASSES SEE IN ITS RETURN WERE FOUND TO BE INCORRECT OR ERRONEOUS OR FALSE AND ADD THAT SUCH BEING THE CASE THERE WOULD BE NO QUESTION OF INVITING THE PENALTY UNDER SECTION 271(1)(C) OF THE ACT AND THAT A MERE MAKING OF THE CLAIM WHICH IS NOT SUSTAINABLE IN LAW BY ITSELF WILL NOT AMOUNT TO FURNISHING INACCURATE PARTICULARS REGARDING INCOME OF THE ASSESSEE . THE SITUATION THAT WE ARE DEALING WITH IS NOT MATERIALLY SIMILAR INASMUCH AS THE FACTS STATED IN THE RETURN ARE FOUND TO BE ERRONEOUS ; THE ASSETS WHIC H WERE CLAIMED TO HAVE BEEN LEASED OUT DID NOT EXIST AND THE ENTIRE LEASE ARRANGEMENT WAS FOUND TO BE A SHAM ARRANGEMENT. A DISALLOWANCE OF DEPRECIATION FOR NON EXISTENT ASSETS CANNOT BE TREATED AT PAR EVEN FOR THE PURPOSES OF IMPOSITION OF PENALTY AND FO R DECIDING WHETHER OR NOT CORRECT PARTICULARS HAVE BEEN FURNISHED WITH A DISALLOWANCE UNDER SECTION 14A AS WAS DEALT WITH BY THE HON BLE SUPREME COURT IN THE CASE OF RELIANCE PETROPRODUCTS 10 . LEARNED COUNSEL HAS ALSO RELIED UPON THE DECISION OF TRIBUNAL I N THE CASE OF KANBAY SOFTWARE 11 IN HIS SUPPORT BUT WE SEE NO SUPPORT TO ASSESSEE S CASE BY THIS DECISION EITHER. AS A MATTER OF FACT IN THIS DECISION THE TRIBUNAL REFERRED TO THREE MUTUALLY EXCLUSIVE SITUATIONS WITH REGARD TO CONSEQUENCES OF ADDITION TO I NCOME BY PLACING THOSE THREE SITUATIONS IN THREE DIFFERENT BASKETS AND THEN ANALYZED POSITION REGARDING IMPOSITION OF PENALTY QUA EACH OF THOSE SITUATIONS. AS EVIDENT FROM THE 9 SUPRA 10 SUP RA 11 SUPRA ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 18 OF 22 FOLLOWING EXTRACTS FROM THE DECISION IT HAS BEEN CLEARLY HELD THAT IN A SITU ATION IN WHICH ASSESSEE IS NOT ABLE TO PROVE HIS BONAFIDES THE PENALTY IS LEVIABLE: 51. THERE CAN BE THREE DISTINCT MUTUALLY EXCLUSIVE SITUATIONS IN THE CASE OF AN ADDITION TO INCOME. IN THE FIRST SCENARIO THE ADDITION MADE COULD BE ON ACCOUNT OF CONTUM ACIOUS CONDUCT OF THE ASSESSEE IN WHICH MENS REA IS ESTABLISHED OR CAN BE REASONABLY INFERRED. AS FAR AS THIS SITUATION IS CONCERNED PENALTY WAS ALWAYS LEVIABLE UNDER SECTION 271(1)(C). IN THE SECOND SCENARIO WHILE THE ADDITION IS MADE TO THE RETURNED IN COME NEITHER IS IT ESTABLISHED OR CAN BE REASONABLY INFERRED THAT THE ADDITION MADE TO THE INCOME IS ON ACCOUNT OF CONTUMACIOUS CONDUCT OF THE ASSESSEE NOR IS IT ESTABLISHED OR CAN BE REASONABLY INFERRED THAT THE ASSESSEE S CONDUCT AND EXPLANATION IS BONAFIDE. IN SUCH A SITUATION IN THE LIGHT OF HON BLE SUPREME COURT S JUDGMENT IN THE CASE OF DILIP SHROFF (SUPRA) PENALTY UNDER SECTION 271(1)(C) COULD NOT HAVE BEEN LEVIED SINCE THE ONUS OF ESTABLISHING MENS REA OF THE ASSESSEE COULD NOT HAVE BEEN DIS CHARGED IN SUCH A SITUATION. HOWEVER AS THE LAW STANDS NOW AND IN THE LIGHT OF THE HON BLE SUPREME COURT S JUDGMENT IN THE CASE OF DHARMENDRA TEXTILE PROCESSORS (SUPRA) PENALTY UNDER SECTION 271(1)(C) WILL BE LEVIABLE SINCE IT IS NOT NECESSARY FOR THE TA X AUTHORITIES TO ESTABLISH MENS REA OF THE ASSESSEE. THAT IS THE AREA IN WHICH LEGAL POSITION HAS CHANGED. HOWEVER THERE IS STILL A THIRD SCENARIO IN WHICH AN ADDITION IS MADE TO THE INCOME BUT IT IS ESTABLISHED OR CAN BE REASONABLY INFERRED THAT ASSESS EE CONDUCT AND EXPLANATION IS BONAFIDE. THESE ARE THE SITUATIONS IN WHICH THE ASSESSEE IS ABLE TO ESTABLISH HIS INNOCENCE. IN SUCH A SITUATION IN ACCORDANCE WITH THE UNDISPUTED SCHEME OF SECTION 271(1)(C) NEITHER THE PENALTY WAS LEVIABLE PRIOR TO HON BLE SUPREME COURT S JUDGMENT IN THE CASE OF DILIP SHROFF NOR IS IT LEVIABLE AFTER THE DHARMENDRA TEXTILE PROCESSORS CASE. 52. IN OUR CONSIDERED VIEW THEREFORE THERE IS NO CHANGE IN LAW SO FAR AS FIRST AND THIRD SCENARIO VISUALIZED ABOVE ARE CONCERNE D. THE SCHEME OF SECTION 271(1)(C) REMAINS AS IT AND THIS SCHEME CLEARLY REQUIRES MUCH MORE THAN A MERE ADDITION TO ASSESSEE S INCOME BEFORE PENALTY UNDER THE SAID SECTION CAN BE IMPOSED. THE VIEWS EXPRESSED BY THEIR LORDSHIPS IN DHARMENDRA TEXTILE PROCESS ORS CASE (SUPRA) DO NOT BRING ABOUT ANY RADICAL CHANGE IN THE SCHEME OF SECTION 271(1)(C) THOUGH THESE VIEWS DO SEEK TO NULLIFY THE DILIP SHROFF JUDGMENT WHICH IN THE ESTEEMED VIEWS OF ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 19 OF 22 THE LARGER BENCH DID NOT TAKE INTO ACCOUNT THE CORRECT SCHEME OF THI NGS AS THESE WERE - MORE PARTICULARLY POST INSERTION OF EXPLANATION 1 TO SECTION 271(1)(C). INDEED EVEN ON THE FIRST PRINCIPLES AND AS SEEN IN THE ABOVE LIGHT WHILE THIS VIEW IS IN ACCORDANCE WITH THE SCHEME OF THE SECTION AND THE AMENDMENT BROUGHT ABOU T IN THE SCHEME OF THE SECTION BY INSERTION OF EXPLANATION 1 TO SECTION 271(1)(C) IT DOES NOT BRING ABOUT ANY RADICAL CHANGE TO THE MAIN SCHEME OF SECTION 271(1)(C) ITSELF. 19. LEARNED COUNSEL HAS STATED THAT IT IS A CASE IN WHICH NEITHER THE EXISTENCE OF THE LEASED ASSETS IS PROVED NOR IS IT DISPROVED AND THEREFORE IT IS NOT A FIT CASE FOR IMPOSITION OF PENALTY. THAT ARGUMENT PROCEEDS ON THE FALLACY THAT UNLESS REVENUE AUTHORITIES ESTABLISH BEYOND DOUBT THAT LEASED ASSET DID NOT EXIST WHICH WILL OB VIOUSLY AMOUNT TO PROVING A NEGATIVE PENALTY CANNOT BE IMPOSED. IT IS ELEMENTARY THAT NONE CAN BE EXPECTED TO PROVE A NEGATIVE. THE ONUS IS ON THE ASSESSEE TO PROVE HIS CLAIM OR AT LEAST GIVE AN ACCEPTABLE EXPLANATION FOR HIS CLAIM AND THE ASSESSEE HAS F AILED ON BOTH OF THESE COUNTS. LEARNED COUNSEL HAS ALSO ARGUED THAT THE REVENUE HAS NOT BEEN ABLE TO ESTABLISH MENS REA OF THE ASSESSEE AND IT HAS FAILED TO DISCHARGE THE BURDEN OF PROVING FALSITY IN THE CLAIM OF THE ASSESSEE. A REFERENCE WAS ALSO MADE TO HON BLE GUJRAT HIGH COURT S JUDGMENT IN THE CASE OF NATIONAL TEXTILES VS CIT 12 BUT LATER DECISIONS OF HON BLE SUPREME COURT HAVE MATERIALLY ALTERED THE SITUATION. WE DONOT THINK IT IS REALLY REQUIRED TO PROVE MENS REA OR FALSITY OF ASSESSEE S EXPLANATION AS A SINE QUA NON FOR IMPOSITION OF PENALTY UNDER SECTION 271(1)(C) . AS HELD BY THIS TRIBUNAL IN THE CASE OF KANBAY SOFTWARE 13 ON WHICH SO MUCH RELIANCE IS PLACED BY THE ASSESSEE WHAT FOLLOWS FROM THESE DISCUSSION IS THAT IN VIEW OF HON BLE SUPREME COUR T S JUDGMENT IN THE CASE OF DHARMENDRA TEXTILE PROCESSORS (SUPRA) 14 ONCE THE MANDATE OF SECTION 271(1)(C) READ WITH EXPLANATIONS THERETO ARE SATISFIED THERE IS NO FURTHER ONUS ON THE ASSESSING OFFICER TO ESTABLISH MENS REA . THE ASSESSEE HAS NOT SATISF ACTORILY DISCHARGED THE ONUS 12 249 ITR 125 13 SUPRA 14 306 ITR 277 ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 20 OF 22 OF PROVING HIS BONAFIDES WITH REGARD TO CLAIM OF DEPRECIATION ON ASSETS WHICH DID NOT EXIST AND ACCORDINGLY FOLLOWING THE KANBAY SOFTWARE DECISION WE HOLD THAT IT IS A FIT CASE FOR IMPOSITION OF PENALTY. WE ARE ALSO NOT IMP RESSED BY ASSESSEE S CLAIM THAT CONSIDERING HIS RETURNED INCOME HE HAD NO GOOD REASONS TO GET INTO ANY MANOEUVRING TO AVOID GENUINE TAX LIABILITY. THESE ARGUMENTS LACK ANY SUBSTANCE AND ANY LEGALLY SUSTAINABLE MERITS. AS FOR LEARNED COUNSEL S RELIANCE ON TRIBUNAL S DECISION IN THE CASE OF BPL SANYO FINANCE LTD 15 THAT IS A DECISION IN WHICH TRIBUNAL HAS GIVEN A FINDING THAT THE ASSESSEE WAS DUPED BY SYSTEMATIC FRAUD AND IT WAS DONE IN THE NORMAL COURSE OF HIS BUSINESS WHEREAS IN THE PRESENT CASE WE ARE OF THE VIEW THAT THE ASSESSEE ENTERED INTO A COMPLEX TRIPARTITE LEASE TRANSACTION WHICH COULD NOT HAVE HAD ANY COMMERCIAL MOTIVES AND WAS ENTERED WITH A VIEW TO CLAIM UNDUE TAX BENEFITS. IN ANY CASE GIVEN THE FACTS OF THE CASE WE ARE UNABLE TO ACCEPT THE THEORY THAT THE ASSESSEE WAS AN INNOCENT VICTIM OF FRAUDSTERS. 20. FINALLY IT IS CASE OF THE ASSESSEE THAT THE INCOME WHICH IS SOUGHT TO BE CONCEALED AT BEST COULD BE DEPRECIATION CLAIM AS REDUCED BY THE INTEREST COMPONENT OF LEASE INSTALMENT WHICH I S BROUGHT TO TAX. WE ARE UNABLE TO SEE ANY MERITS IN THIS APPROACH EITHER. THE ASSESSEE HAS CLAIMED A DEDUCTION FOR DEPRECIATION WHICH IS FOUND TO BE FALSE AND IN RESPECT OF WHICH IMPUGNED PENALTY IS LEVIED. JUST BECAUSE SOME OTHER INCOME HAS NOW BEEN OFFE RED TO TAX BY THE ASSESSEE THE INCOME CONCEALED BY MAKING A FALSE CLAIM OF DEPRECIATION CAN NOT BE REDUCED. IN ANY EVENT THE AUTHORITIES BELOW HAVE GIVEN A CATEGORICAL FINDING THAT IT IS A BOGUS LEASE AND THE ORDERS OF THE AUTHOR ITIES BELOW DO NOT REFL ECT THE SAID ADJUSTMENT OR THE FACT OF INTEREST INCOME BEING OFFERED TO TAX. WE ARE UNABLE TO SEE ANY MERITS IN THIS CLAIM EITHER. HOWEVER WE DO SEE MERITS IN LEARNED COUNSEL S PLEA THAT SINCE THE OTHER TWO ADDITIONS WHICH ARE COVERED BY THE IMPUGNED PEN ALTY HAVE BEEN DELETED THE QUANTUM OF PENALTY IS TO BE REDUCED TO THAT EXTENT. FOR THIS 15 SUPRA ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 21 OF 22 LIMITED PURPOSE WHILE WE UPHOLD THE PENALTY IN PRINCIPLE WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSES OF FRESH QUANTIFICATION OF PENALTY IN THE LIGHT OF THE ABOVE OBSERVATIONS. 21. IN THE RESULT AND SUBJECT TO THE ABOVE OBSERVATIONS THE APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON 20 TH DAY OF APRIL 2010. SD/ - SD/ - ( N V VASUDEVAN ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 20 TH DAY OF APRIL 20 10. JANHAVI COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT MUMBAI 4. THE COMMISSIONER (APPEALS) MUMBAI 5. DEPARTMENTAL REPRESENTATIVE - F BENCH MUMBAI 6. GUARD F ILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI ITA NO. 1325/MUM/07 ASSESSMENT YEAR 1996 - 97 PAGE 22 OF 22 DATE INITIALS 1. DRA FT DICTATED ON 20 - 04 - 10 PS 2. DRAFT PLACED BEFORE AUTHOR 20 - 04 - 10 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM /JM 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMEN T ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER