Commissioner of Income Tax vs Sundaram Finance Limited

Elipe Dharma Rao, J.—The assessee-company is engaged in the business of hire purchase financing and leasing and allied activities. The

assessee has claimed 50 per cent. of 100 per cent. depreciation on a sum of Rs. 30,52,84,527 alleged to be the cost of solar moulds for solar

heater system, venturi scrubber and wet oxidation equipment leased to EPK Softech Pvt. Ltd. The officers of the Directorate of Revenue

Intelligence, on inspection of the premises of EPK Softech Ltd. found that the said machinery imported by EPK Softech Pvt. Ltd., jointly with the

assessee was not a genuine transaction and the said machinery was assembled at Ranipet and exported by EPK International Ferrites to Singapore

and therefrom it was imported by EPK Softech Pvt. Ltd. to Tuticorin Port and, thus, the machinery received from Singapore was of Indian origin

but misdeclared as of foreign origin. On the basis of the marks and numbers found in the containers and the materials available on record, the

Assessing Officer came to a conclusion that the real value of the machinery was concealed by claiming 100 per cent. depreciation and furnished

inaccurate particulars and, therefore, levied penalty u/s 271(1)(c)(iii) of the income tax Act, 1961. It was the further conclusion of the Assessing

Officer that the so-called import was made by the assessee only for the purpose of availing of 100 per cent. depreciation. The order of the

Assessing Officer was challenged unsuccessfully by the assessee before the Commissioner of income tax (Appeals). It was the contention of the

assessee before the appellate authority that M/s. ETK Softech Pvt. Ltd., and ETK International Ferrities Ltd., have cheated the assessee and they

came to know about the sham import only at the time of enquiry by the DRI and, thereafter, they withdrew the claim of depreciation, vide letter

dated September 22, 2000, and treated the same as a loan transaction. The appellate authority rejected the aforesaid contention of the assessee

and held that the appellant knew before filing of the return that the leased machinery''s value was much less and yet the appellant had chosen to

claim 100 per cent. depreciation on much higher price. Ultimately, by relying on the decision of the Supreme Court in M/s. K.P. Madhusudhanan

Vs. Commissioner of Income Tax, Cochin, upheld the order of the Assessing Officer. The assessee took the matter in appeal before the income

tax Appellate Tribunal. The Tribunal reversed the findings of the authorities by holding that the documentary evidence and the sequence of events

leading to the assessee''s providing finance to the transaction do not prove that the assessee had colluded with the lessee to finance a sham

transaction and the mens rea is not palpable in this case. Aggrieved by the order of the Tribunal, the Revenue has come forward with the present

appeal. At the time of admission of this appeal the following substantial question of law have been framed for consideration:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in setting aside the orders of the

authorities below and deleted the penalty u/s 271(1)(c) of the income tax Act, even though the withdrawal of claim of depreciation was not a

voluntary act of the assessee-company is valid?

According to the Department, the assessee has imported machinery along with ETK International Ferrites Ltd., Ranipet, and it was leased to

ETK Softech (P.) Ltd., by extending lease finance to an extent of Rs. 30.53 crores. Out of the said amount, the assessee had claimed 50 per cent.

as depreciation. However, on the inspection made by the Directorate of Revenue Intelligence, it was found that the machinery imported by ETK

Softech (P.) Ltd. was not a genuine transaction and the machinery was assembled at Ranipet and exported by ETK International Ferrites Ltd.,

through Chennai Port to Singapore and that even the one time seal affixed on the counter stuffed with the goods from Chennai port was found

intact at the time of import at Tuticorin Port. On the aforesaid basis, they came to a conclusion that the machinery received from Singapore was of

Indian origin, but was misdeclared as foreign origin. Therefore, the authorities thought it fit to levy penalty. On the other hand, it was the case of the

assessee that when the DRI had questioned about the transaction in question, the assessee without waiting for the final outcome of the enquiry, put

forth all the facts before the Department and paid an ad hoc amount of Rs. 5.35 and also requested the authorities to treat the entire transaction as

a loan transaction to show their bona fides and, therefore, there is no concealment or furnishing of inaccurate particulars in the return as alleged by

the Department.

The Department had mainly relied on the statement of one Shri Sivasankaran of M/s. Anbu Shivam Valuers, who has inspected the machinery

on behalf of the assessee and gave a statement dated March 7, 2000, recorded by the DRI to the effect that the machinery was of Indian make

and would not cost much. The Tribunal has heavily come down on the statement given by the said person as the statement given by the said officer

before the DRI was to safeguard his skin and the assessee genuinely believed the valuation report given by the valuer much earlier. The main

reason for reversing the decision of the authorities by the Tribunal is that the import documents, clearance by the Customs Department, valuation

report of the valuer, all prove that mens rea is not palpable in this case and the Departmental presumption is only based upon the statement given

by the valuer to the DRI.

Learned standing counsel appearing for the Revenue submitted that the assessee-company has claimed 100 per cent. depreciation on the cost of

solar moulds for solar heater system leased to one EPK Softech P. Ltd. and, on inspection, when it was found by the officials of the Directorate of

Revenue Intelligence that the machinery received from Singapore was of Indian origin but wrongly declared as of foreign origin, the assessee

withdrawn the claim of depreciation. Such act of the assessee, according to the Revenue, was not a voluntary act, and, therefore, penalty was

rightly imposed by the authorities and such concurrent finding ought not to have been interfered with by the Tribunal on the ground that the

Departmental presumption is only based upon the statement given by the valuer of the DRI and such presumption cannot be the basis of levy of

penalty. In support of the aforesaid contention learned standing counsel placed reliance upon the decisions.

Learned senior counsel appearing for the assessee contended that the finding of the Tribunal on the voluntary nature of the assessee''s

withdrawal of the claim was clearly borne out by the fact that prior to the letter dated September 22, 2000, the Department has no iota of

knowledge regarding the present transaction and there is no logical reason for the assessee to make a claim in December, 1999, only to withdraw

the same in September, 2000, and suffer huge interest liability on such tax, when there was no intervention by the Department to this transaction.

He has attacked the findings of the Assessing Officer as well as the Commissioner of income tax (Appeals) that they were based on surmises and

presumption as if the assessee had knowledge of the fraud or that they were in complicity with the lessee in the fraud played on the import

transaction. According to the learned senior counsel, the Tribunal has rightly held that there is no documentary evidence to conclude that the

assessee had concealed any transaction and, on the other hand, the documentary evidence and the sequence of events leading to the assessee''s

providing finance to the transaction do not prove that the assessee had colluded with the lessee to finance a sham transaction and the aforesaid

finding of the Tribunal being a factual finding based on documentary evidence, this court, sitting in appeal, should not disturb such finding and the

present appeal is liable to be dismissed.

It is very unfortunate case where the Tribunal has upset the concurrent findings of the authorities on the flimsy ground that the Revenue has failed

to establish mens rea in the transaction held between the assessee and the lessee and the conclusion arrived at by the authorities is based on

presumption. The appeal relate to the assessment year of 1999-2000. During the course of assessment proceedings u/s 143(3), it was found that

the assessee had claimed 50 per cent. of 100 per cent. depreciation allowable on a sum of Rs. 30,52,84,527, being the cost of solar modules for

solar heater system, venturi and wet oxidation equipment leased to ETK Softech (P.) Ltd. The assessee had imported machinery along with ETK

International Ferrites Ltd., Ranipet, and the said machinery was leased to ETK Softech (P.) Ltd., to the extent of Rs. 30.53 crores and collected

an amount of Rs. 24 crores as collateral and held the same as lease deposit. The assessee claimed depreciation of Rs. 15,26,42,264 on this

machinery and returned the lease rent of Rs. 2,14,20,525 as income. During the inspection made by DRI on the premises of the lessee, namely,

ETK Softech (P.) Ltd., it was found that the so called machinery imported by the lessee jointly with the assessee was not a genuine transaction and

the said machinery was assembled at Ranipet and exported by ETK International Ferrites Ltd., through Chennai port to Singapore and therefrom it

was imported by ETK International Ferrites Ltd., to Turicorin Port.

It is the case of the Revenue that the assessee has imported the machinery on account of M/s. Softech (P.) Ltd., without verifying the

genuineness of the import and, even after the import, its worthiness and technical feasibility, though duty bound as an importer, were not verified by

the assessee and further the valuer appointed by the assessee was aware that the machinery imported was of Indian origin. This statement of the

Revenue was denied by the assessee by stating that its act of extending lease finance to the lessee was within the framework of the Import and

Export Policy, it had been furnished technical feasibility/financial viability report by the members of the appraisal committee, that all necessary

import documents were obtained, that since the lessee alone is the importer, the assessee-company was not enjoined with any duty to verify the

worthiness of the capital goods and that the assessee had no reason to entertain any doubt with regard to the goods which came to India would be

of quality different from that one intended to be imported. On the aforesaid background, the question arises for consideration is whether the

assessee had an hand in such transaction and it had deliberately made false claim for deduction of tax.

It is not in dispute that the machinery which was sought to be leased out by the assessee to the lessee M/s. Softech (P.) Ltd., was imported from

Ranipet to Singapore and from there it was exported to Tuticorin Port and the FOB value of US $ 171300. The assessee had filed its return of

income on December 31, 1999, claiming 100 per cent. depreciation on the machinery. In order to appreciate the contention of the assessee, we

have carefully gone through the valuation report and the sworn statement made by the valuer before the customs authorities on March 7, 2000.

The valuation report for the plant and machinery dated December 13, 1999, was given by one Mr. A. Sivasankaran of M/s. Anbusivam Valuers,

whereunder the fair market value of the plant and machinery was assessed at Rs. 30.30 crores. After inspection by the DRI authorities, the

aforesaid Mr. A Sivasankaran was examined and he had made the following statement (extract is made from the typed document furnished on

behalf of the respondent):

I am giving the truthful statement. You have asked me about the ''valuation report'' given for M/s. ETK Softech Pvt. Ltd. Ranipet. Sri Shankar,

DGM, Sundaram Finance Ltd. contacted me and gave me the work order on January 10, 1999, to value the equipment leased by them to M/s.

ETK Softech Pvt. Ltd. Ranipet. Accordingly on December 11, 1999, myself and other engineers V. Sekar (Mech.), V. Govindasamy (Software),

Gajalakshmi (Elec. dip.) came along with me and proceeded for inspection. We reached at Ranipet at 10.15 am. Mr. Kannan, director, Softech

Pvt. Ltd. and Govindarajan, ETK IF were present and they asked me to wait for Sri Parthasarathy. We waited there after inspection up to 2.30

p.m. At 12.30, Sri Srinivasan, GM and Shankar, DGM, Sundaram Finance also came. This, they have not informed to our team of valuers. They

also inspected the factory and joined us in the committee room. All of us expecting Sri Parthasarathy who is having a engagement not turned till we

leave the place at 2.30 p.m. All of us returned to Chennai same day. You asked about the inspection conducted by us for our valuation report. The

equipment given in the work order, we have verified after identification by Kannan and I have told him that this materials seems to be of Indian

make only and this won''t cost much.

From the above statement it is apparent that the valuer Mr. A. Sivasankaran had inspected the machinery and, while he was waiting Mr.

Srinivasan, GM and Shankar, DGM of Sundaram Finance had come to the factory at 12.30 and they after inspection joined Mr. A. Sivasankaran

at the committee room and had a discussion. Since Mr. A. Sivasankaran was of the opinion that the machinery is of Indian make and it would not

cost much, he would have necessarily disclosed the said fact with the aforesaid officials of the assessee-company in the committee room and

further when he had also informed this material fact to Mr. Kannan, the director of M/s. Softech Pvt. Ltd., the assessee cannot plead ignorance of

the fact that they were kept in dark. It is also pertinent to note that after this inspection and after disclosure of the said fact to the director of M/s.

Softech Pvt. Ltd., and after a consultation in the committee room with the officials of the assessee-company, whose presence is not denied by the

assessee, the assessee had submitted its return on December 31, 1999, claiming depreciation. It is also to be noted that one of the officials of the

assessee-company who had inspected the machinery along with the valuer, namely, Mr. K.M. Shankar, DGM was examined by the DRI in

August, 1999, and his statement was recorded on August 9, 1999. It is also to be seen that while extending lease finance to the extent of Rs.

30.53 crores to the lessee, the assessee had collected Rs. 24 crores as collateral. This attitude of the assessee shows that the assessee may be

knowing the fact that machinery is not of much cost as it was shown in the valuation report and we can even go to an extent of assuming that the

assessee knowing that the machinery is of lessee cost and of Indian make had collected a huge sum of Rs. 24 crores towards the lease amount of

Rs. 30.53 crores as collateral and later adjusted towards the dues from the lessee.

The learned senior counsel has vehemently contended that the assessee knowing that in May, 2000, after the assessee was given information

by the Customs Department that the equipment was actually of Indian origin and that the lessee and its sister concern had manipulated the

transaction, immediately, without waiting for the notice issued by the Department, had voluntarily gave a letter dated September 22, 2000,

withdrawing the claim of depreciation to show their bona fides and, therefore, the assessee cannot be found fault with.

This contention, though appears to be prima facie attractive, it cannot be accepted for the reasons stated by us in the preceding paragraphs.

Apart from above, the fact of withdrawal of the claim of depreciation appears to be artificial instead of natural as stated by the learned senior

counsel. The assessee had chosen to issue withdrawal notice on September 22, 2000, whereas, even, according to the assessee, the Department

had issued scrutiny notice on September 25, 2000 (according to the Department, the said notice was dated September 20, 2000), three days

prior to issuance of notice. This would only go to show that, after the Department had thought it fit to initiate action against the assessee, the

assessee had issued the withdrawal notice and, even without waiting for the result of the enquiry, had volunteered to deposit a sum of Rs. 5.35

crores towards additional tax liability. In the above background of facts the only presumption would be that the assessee being-well aware that

after the enquiry it would be liable to pay additional tax and penalty, was forced to make payment voluntarily. Therefore, we are unable to

appreciate the contention of the learned senior counsel that in order to show the bona fide of the assessee, the assessee had volunteered to make

payment even before the enquiry proceedings are completed.

Now, the stage is set to examine the decisions relied on by the assessee in support of his contentions. Learned senior counsel has mainly relied

on the following decisions of the hon''ble. Supreme Court:

(1) Dilip N. Shroff Karta of N.D. Shroff Vs. Joint Commissioner of Income Tax, Special Range Mumbai and Another,

(2) Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others,

(3) Union of India (UOI) Vs. Rajasthan Spinning and Weaving Mills, and

(4) Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Pvt. Ltd.,

We have perused all the aforesaid decisions relied on by the learned senior counsel. The first cited decision in Dilip N. Shroff''s case was

disapproved by the hon''ble Supreme Court in the second cited decision in Dharamendra Textiles'' case. This decision was relied on by the counsel

to contend that the penalty u/s 271(1)(c) is a civil liability and willful concealment is not an essential ingredient for attracting civil liability. The

relevant paragraph which was pressed into service is as follows (page 302 of 306 ITR):

The Explanations appended to section 271(1)(c) of the income tax Act entirely indicate the element of strict liability on the assessee for

concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff Karta of N.D. Shroff Vs. Joint

Commissioner of Income Tax, Special Range Mumbai and Another, has not considered the effect and relevance of section 276C of the income tax

Act. The object behind the enactment of section 271(1)(c) read with the Explanations indicates that the said section has been enacted to provide

for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting

civil liability as is the case in the matter of prosecution u/s 276C of the income tax Act.

A reading of the aforesaid paragraph makes it clear that the penalty u/s 271(1)(c) is a civil liability, but it does not relieve the assessee from the

liability as the object behind the enactment of the said section is to provide for a remedy for loss of revenue.

The aforesaid decision came to be further clarified by the hon''ble Supreme Court in Union of India (UOI) Vs. Rajasthan Spinning and

Weaving Mills, whereunder the hon''ble apex court has held that application of section 11AC of the Central Excise Act would depend upon the

existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have

no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A.

Ultimately, the hon''ble apex court had not made any observations with regard to section 271(1)(c) or other statutory provisions that came up for

consideration.

In the last cited case Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Pvt. Ltd., , after considering the aforesaid

decisions, the hon''ble Supreme Court came to the conclusion that merely because the assessee had claimed the expenditure, which claim was not

accepted or was not acceptable to the Revenue, that by itself would not, attract the penalty u/s 271(1)(c) and, when such contention of the

Revenue is accepted, then in every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite

penalty u/s 271(1)(c), which is clearly not the intendment of the Legislature.

It is no doubt true that in every case where the claim made by the assessee is not accepted by the Assessing Officer for any reason, the

assessee will be levied penalty is not the intend of the Legislature and it would depend upon the facts of every case. But, the aforesaid decision will

not come to the aid of the assessee as in the said case no fault was found in the particulars furnished by the assessee, whereas it is not so in the

case on hand. Therefore, with respect, the aforesaid cases would not apply to the facts of the present case.

In view of the above, we are of the considered opinion that the Tribunal, without appreciating the facts of the case in an appropriate manner,

had came to a strange conclusion that the Departmental presumption is only based upon the statement given by the valuer and such valuation

cannot be the basis for levy of penalty. In the preceding paragraphs, we have concluded that the finding of the authorities based on the evidence of

the valuer, which was corroborated by the circumstantial evidence and the background of the case, are not presumptive as has been concluded by

the Tribunal. And, therefore, the decision of the Tribunal is liable to be interfered with. For the reasons stated above, the substantial questions of

law raised in these appeal is answered in favour of the Revenue and against the assessee. Accordingly, the appeal is allowed. No costs.