Income Tax Appellate Tribunal - Cochin
Madras Spinners Ltd. vs Deputy Commissioner Of Income-Tax on 12 August, 1992
Equivalent citations: [1993]47ITD213(COCH)
ORDER
G. Santhanam, Accountant Member
1. These two appeals are by the assessee of which one relates to the disallowance of depreciation and investment allowance of the machinery installed and the other relates to the levy of penalty under Section 271(1)(c) of the Income-taxAct, 1961. The appeals relate to the assessment year 1986-87 and the relevant previous year ended on 31-3-1986.
2. The assessee is a limited company engaged in the manufacture and sale of cotton yarn. The appellant had purchased a 380 KVA generator set from M/s. Batliboi & Co. Ltd., Coimbatore on 5-3-1986 at a cost of Rs. 8,60,000. It had also purchased an LR High Speed Comber from M/s. Lakshmi Machine Works Ltd., Coimbatore on 8-3-1986 for a price of Rs. 6,87,506. It is not in dispute that the generator in question arrived at the factory site of the appellant on 7-3-1986 and the engine and other components of the generator were assembled on the permanent foundation at the mill premises on 10-3-1986 under the supervision of M/s. Batliboi & Co. Ltd. Nor is it in dispute that the comber engine was erected before 31-3-1986. The dispute is only on the limited issue whether these two machineries were put to use before 31-3-1986 so as to be eligible for depreciation and investment allowance. The learned Dy. CIT (Asst.) was of the view that the generator set was neither installed nor commissioned before 31-3-1986 on the basis of the enquiries conducted by her. Sri P.V. Wilson in his statement before the Inspector dated 26-11-1987 had stated with respect to the generator engine No. 25143985 pre-installation inspection of the engine was done on 8-5-1986 and on 12-5-1986 certain defects were pointed out to the customer and on 14-5-1986 New Engine Performance Inspection (NEPI in short) was prepared and the engine was commissioned after the completion of the installation [page 8(1) of the assessee's paper book]. The assessing authority had also noted that the appellant's General Manager in his letter dated 15-5-1987 to M/s. Palghat Diesel Sales and Service, Palghat (page 12 of the departmental paper book) had categorically stated that the generator engine was installed only on 19-6-1986 and has worked only for 1600 hrs and that it had developed certain defects for which he had requested repairs free of cost. Yet in another letter dated 22-5-1987 (page 13 of the departmental paper book) M/s. Batliboi & Co. Ltd., had advised M/s. Palghat Diesel Sales and Service to attend to the repairs mentioning that the generator engine which was commissioned on 19-6-1986 had clocked only for 1600 hrs, but had failed on 14-5-1987. As per the letter of M/s. Imperial Engineering Co., Cochin, the commissioning of the generator was only on 20-6-1986. No doubt the Dy. CIT (Asst.) had noticed that the log book maintained by the appellant which was recorded by her in the course of her inspection of the factory revealed that the generator was put to use during the latter half of March 1986, but she was of the view that in the wake of materials collected by her from the suppliers of the engine for the generator and also the service agents at Palghat the entries in the log book are not believable. Further, it was only in respect of this particular generator for a limited period that log book entries bore the initials of the General Manager but the log book maintained for other generators did not bear such initials and, therefore, the log book entries were created as an after-thought to support the version of the assessee. She had also examined the Electrical Engineer on the staff of the appellant who had asserted that the generator was put to use though unofficially with effect from 14-3-1986 with the help of their own staff. The Managing Director of the appellant-company was also examined who had stated that the generator was installed and with temporary connections the same was put to use prior to 31-3-1986 on an emergency basis because the old generator which was in use had failed all of a sudden in the month of March 1986. Thus rejecting the contention of the assessee, on the basis of the materials collected from M/s. Palghat Diesel Sales and Service, Palghat and the correspondence referred to in this paragraph above, she came to the conclusion that the generator set was commissioned only subsequent to the close of the previous year and, therefore, the appellant was not entitled for deduction of depreciation and investment allowance on the same for the assessment year 1986-87. For the same reason, she initiated action under Section 271(1)(c) of the Income-tax Act, 1961, for concealment of particulars of income.
3. As for LR High Speed Comber, the learned Dy. CIT (Asst.) found that the same was purchased in the month of March 1986. The erection work was carried out by M/s. Super Sales Agencies Ltd., Coimbatore, whose technicians have to submit weekly reports from the premises of the assessee to their headquarters and the assessing authority impounded those weekly reports and examined them. She noted that one P. Muthuswamy and R. Suresh were deputed for this Job and started the work on 25-3-1986 and she gave the extract of the report as follows :
25-3-1986 - Reported Madras Spinners - Case opening checking. 26-3-1986 - Levelling complete - comb shaft. 27-3-1986 - Detaching roll head stock complete. 29-3-1986 - Table guide piece waste box. 31-3-1986 Back side complete. Preparation of for trial run. 1-4-1986 - Waiting for motor go to LMW. 2-4-1986 - Trial run. 3-4-1986 - Waste checking. 4-4-1986 - Relieving.
From the above she concluded that the trial run was carried out only on 2-4-1986 and the comber was worked on 3-4-1986 with good cotton. She rejected the contention of the appellant that the comber was put into operation on 29-3-1986 itself with the help of its own maintenance people and when the Super Sales Agencies put it into operation on 31-3-1986 the motor shaft got cut on that day and hence there was replacement which resulted in restarting of the comber on 3-4-1986. Therefore, she concluded that the erection of the comber was completed only on 3-4-1986 and the assessee was not entitled to depreciation and investment allowance on the same for the assessment year 1986-87. For these reasons she levied penalty under Section 271(1)(c) of the IT Act. The assessee carried the matter in appeal. Same contentions were reiterated before the first appellate authority. The learned first appellate authority held that in the light of the materials collected by the learned Dy. CIT (Asst.), the assessee's version that it had installed the generator set and brought it into use before the end of the previous year cannot be accepted. The log book entries were rightly rejected by the Assessing Officer. Therefore, the generator set was not brought to use during the previous year. As far as the comber is concerned, he held that the extracts of the weekly reports pin-pointed the date of actual user of the comber after the end of the previous year. Hence the assessee's version was not believable. For these reasons, he confirmed the disallowances and the levy of penalty under Section 271(1)(c). The assessee is on further appeal.
4. We have heard rival submissions at length and perused the records. The generator set arrived at the factory on 7-3-1986. The comber was delivered to the appellant and the erection work started on 25-3-1986. These two dates fall during the previous year relevant to the assessment year 1986-87. We deal with the comber first. The learned Dy. CIT (Asst.) concluded that the comber was put to use only on 3-4-1986. The appellant has given a photostat copy of the report of the progress in the erection work filed by Sri P. Muthuswamy and R. Suresh at page 39 of its paper book. On a perusal of the report, we notice disparity between what has been extracted in the assessment order on the basis of which adverse inference was drawn against the assessee and what is found in the photostat copy of the report as given in page 39 of the appellant's paper book and we reproduce the same below :-
As per assessment order As per photostat copy of
the report filed by the
technicians
31-3-1986 Back side
complete - 31-3-1986 Back side
preparation of for complete - preparation
trial run. trial run -
Brush motor shaft
cut.
Sri C.K. Nair vehemently contended that the report filed by the technicians is in favour of the assessee in that it spoke of the trial run on 31-3-1986. In the trial run the brush motor shaft was cut and, therefore, it had to be repaired and the second trial run was done on 2-4-1986. Therefore in the relevant previous year itself the first trial run was made and thus the machinery was put to use. We uphold the contention of the learned counsel for the assessee. There are no such words as 'of and 'for' in between the words 'operation' and 'trial run' in the photostat copy of the progress report. What is mentioned there is 'preparation', 'trial run'. Therefore, it is reasonable to infer that on 31-3-1986 the machine was prepared and the trial run was taken out. In the trial run the brush motor shaft was cut. Therefore, the motor was to be sent to M/s. Lakshmi Machine Works Ltd., for repairs on 1-4-1986 and the further trial run was done on 2-4-1986. In the assessment order, the fact that the brush motor shaft cut was omitted to be mentioned. Therefore, going by her extracts the learned Dy. CIT (Asst.) had drawn an adverse inference, but going by the records as they are with the revenue, a photostat copy of which has been furnished before us, we have no hesitation in holding that the first trial run of the comber was done on 31 -3-1986. Hence the machine was put to use though for a few hours and as such the assessee would be entitled to depreciation and investment allowance on the same. The authorities have not properly appreciated the full remarks of the technicians as found in their progress report as on 31-3-1986 and erred in drawing an adverse inference against the assessee.
5. Since we have held that the assessee has used the comber in the previous year relevant to the assessment year 1986-87, it cannot be said that the assessee has deliberately claimed deduction of depreciation and investment allowance with reference to the comber and, therefore, penalty under Section 271(1)(c) on this count cannot stand. The same is deleted.
6. Next we turn to the issue whether the generator set was put to use before 31-3-1986. The statement given by Sri Wilson of Palghat Diesel Sales and Services Agencies, the reports dated 10-3-1986, 8-3-1986 and 19-6-1986 of the Service Representatives of Palghat Diesel Sales and Services Agencies, the correspondence with M/s. Batliboi & Co. Ltd. and the quotations for electrification work of M/s. Imperial Engineering Co. etc., are in favour of the revenue's stand that the generator was commissioned only after 31-3-1986. However, the appellant's contention is that though for purposes of warranty and for purposes of Electricity Board Regulations pucca installation was completed after 31-3-1986 and commissioning was recorded as from a later date, factually the appellant had brought the generator to use within the end of the previous year. There are circumstances, the analysis of which support the version of the assessee. The assessee is not a first time user of the generator. It was already working on a generator since 1983 and there is no dispute about this. The assessee has in its employment a qualified Electrical Engineer and other qualified staff in its electrical wing and there is no controversy about this. The Electrical Engineer, Sri Pushparaj was summoned and examined by the Assessing Officer on 1-12-1987. Sri Pushparaj had admitted that the approval from the Chief Electrical Inspector of Kerala Government was received only in the month of April 1986 (though the exact date was not immediately known) and the A Grade Contractor viz., M/s. Imperial Engineering Co., Ernakulam, did the electrification work of the impugned generator set in the month of June 1986. The following questions and answers are relevant :-
Q. 3 : When the electrification itself has been done in the month of June 1986 can you say that the Diesel Gen. set was commissioned only in the month of June 1986 ?
A. : This was done by our own men based on temporary connection on 14-3-1986.
Q. 4 : I now show you (a) letter from your General Manager dated 15-5-1987, (b) letter from Batliboi & Co. dated 22-5-1987, (c) the NEPI Report from M/s. Palghat Diesel Sales & Services dated 19-6-1986, (d) Pre-Installation Report dated 8-5-1986 from the same concern, (e) Report dated 10-3-1986 from P.D.S. & Services. All these documents go to prove that the engine was first commissioned beyond the accounting period ended 31-3-1986 and not prior to 1-4-1986. What do you say about this?
A. : We commissioned the Gen. set unauthorisedly for the emergency purposes. The only record available to support is our own log book which would show that the engine was first operated on 14-6-1986. That is why you will find them in the G.M's letter that the commissioning of the Gen. set is on 19-6-1986 which is for the record purposes whereas with the temporary electrical connections it was commissioned prior to 31-3-1986.
Q. 5 : If your diesel log book is to show all the hours of running of the Generator set why it does not show the running of the engine on 17th, 18th and 19th of June which is evidenced by the records mentioned in your company and in the Palghat Diesel Sales and Services?
A. : We might have used log sheets. But I am not in a position to produce them before you.
The statement of Shri Pushparaj is supported by entries in the Log Book of the concerned generator. The log book for the concerned generator contained the entries for trial run on 14-3-1986 and the time of operation appeared to be from 8.00 a.m. to 3.00 p.m. Similar entries appear on 15, 18, 23, 24, 27, 29 and 30th of March. In all these folios which contained entries, the General Manager has affixed his signature in addition to that of the operator. The Assessing Officer rejected the log book entries in respect of the impugned generator for the period from 14-3-1986 to 30-3-1986 on the ground that in the case of the log book entries maintained for other generators, the General Manager did not affix his signature. The log book in our opinion is a contemporaneous record. The appellant explains the presence of the signature of the General Manager in the relevant folios pertaining to the impugned generator as due to the fact that as the generator was unofficially used during that period, the operator had obtained the authorisation for such unauthorised user from the General Manager who had signed the relevant pages in token of his approval. The other generators were put to official use as and when they were used and, therefore, the General Manager did not sign the log books maintained for such generators. The explanation of the assessee appears to be plausible. When the assessee clandestinely puts an asset to use - clandestine in the sense that no permission was obtained from the Chief Electrical Inspector of the Government of Kerala-it was but natural, for the operator to expect authorisation of such clandestine user from the General Manager-in-charge of the factory. Further the log book was not suo motu produced by the assessee. Therefore, there is force in the contention of the learned counsel for the appellant that the General Manager was not previously informed of the Assessing Officer's visit to the factory and therefore it cannot be said that the General Manager had occasion to fabricate entries in the log book in anticipation of her visit. Therefore, a legal presumption can be drawn that the log books found with the appellant along with other books recovered and impounded in the course of survey or inspection by the governmental authorities were genuine and the entries therein represented the true state of affairs. The Electrical Engineer has emphatically stated that he is conversant with the work connected with the generator. The assessee is not the user of the generator for the first time. There was an old generator in use since 1983. It had its own panel boards for supply of electricity and other electrical installations and the appellant was generating power with the aid of these electrical installations. It is on record that there was break down of the generator of 1983 origin in the second half of March 1986 as will be evident from the emergency call report dated 18-3-1986 (page 27 of the assessee's paper book) and the further report dated 20-3-1986 (page 28 of the assessee's paper book). These are borne out by records of the service representatives of Cummins Diesel Sales and Services India Ltd., Madurai, whose reports are to be found in the paper book of the assessee from page 26 to page 29. The appellant had also complained to M/s. Batliboi & Co. Ltd., about the break down of the old generator in its letter dated 24-3-1986 and M/s. Batliboi & Co. Ltd. in turn requested the supplier of the turbocharger to immediately arrange replacement even though the warranty period has expired. Then there is on record a returnable gate pass No. 1154 by which turbocharger was sent for repairs on 25-3-1986. So we come to the conclusion that the first generator has failed at least from 18-3-1986. With the failure of the first generator and if the controversial generator had not been brought to use (though clandestinely) obviously the production should have suffered as Kerala is a State notorious for low voltage, power shedding and frequent power failures. In page 36 of the paper book the appellant has given the details of such power shedding and low voltage for the entire month of March 1986 and the relevant date on and from 15-3-1986 is as follows :
15-3-1986 0 hrs. 5 mnts. 10 hrs. 16-3-1986 0 hrs. 30mnts. 1 hr. 15 mnts. 17-3-1986 1 hr. 30mnts. 45 mnts 18-3-1986 7 hrs. 20mnts. - 19-3-1986 0 hrs 20mnts. - 20-3-1986 1 hr. 45mnts. - 21-3-1986 - - 22-3-1986 - 2 hrs. 23-3-1986 - - 24-3-1986 2 hrs. 30 mnts. - 25-3-1986 1 hr. 30 mnts. 1 hr. 30 mnts. 26-3-1986 - 2 hrs.45 mnts. 27-3-1986 - 2 hrs.30 mnts. 28-3-1986 0 hrs. 10 mnts. - 29-3-1986 3 hrs. 30 mnts. - 30-3-1986 1 hr. 2 mnts. - 31-3-1986 0 hrs. 30 mnts. -
At the same time, a comparative statement of production for the month of March 1986 has also been furnished by the appellant at page 37 as follows :-
Production details for March 1986:
1-3-1986 to 16-3-1986 to
15-3-1986 31-3-1986
No. of days worked 15 16
Duration of Power failure 14 hrs. 10 min. 21 hrs. 00 mln.
Duration of Low voltage 19 hrs. 15 min. 10 hrs. 45 min.
Duration of Total 33 hrs. 25 min. 31 hrs. 45 min.
Production (Kgs) 59198 71400
Production per day (Kgs) 3947 4463
From the comparative statement thus furnished, it is seen that in the second half of March the duration of power shedding and low voltage put together amounted to 31 hrs. 45 minutes as compared to 33 hrs. 25 minutes in the earlier period from 1-3-1986 to 15-3-1986. But the production was more in the latter half of March 1986 as compared to the first half of the month. Therefore, there is force in the contention of the learned counsel for the appellant that the first generator having failed, if the controversial generator was not brought to use, the production in the period from 16-3-1986 to 31-3-1986 should have naturally fallen in the context of low voltage and power shedding. The fact that it has not fallen, but has increased would lend support, to the version of the appellant that in the place of the first generator, the controversial generator must have been used albeit unauthorisedly. Even if computation is made from 18-3-1986 the date on which the turbocharger of the old generator totally failed and due allowance is made for the average production between 16-3-1986 to 18-3-1986, we are satisfied that but for the working of the controversial generator the appellant would not have achieved that much production. The assessing authority dismissed the contention of the assessee in this behalf by looking into the total production of the whole year instead of focusing her attention on the production for the impugned period and thus erred in drawing an adverse inference against the appellant.
7. It is the case of the revenue that the appellant has not put the generator set on the foundation even before 31 -3-1986. The records speak otherwise. M/s. Batliboi and Co. Ltd., has stated categorically in their letter dated 22-7-1988 that Kirloskar Cummins Engine Model KTA-1150G Engine SI. No. 25143985, 380 KVA Kirlosakar Alternator were assembled on the permanent foundation at the mills on 10-3-1986 under the supervision of their engineer (page 1 of the assessee's paper book). Thus the generator was laid on a permanent foundation by 10-3-1986. On the same day the service representative has done "New Engine Inspection" and has given certain instructions to the appellant as follows :-
Inspected the engine for transporting damages and checked all the accessories, found OK.
Explained all the installation details to the customer regarding the exhaust, fuel and air system.
Also informed that the best location of the silencer muffler is next to the exhaust or 2/5 or 4/5 of the total length of the exhaust piping.
Advised the customer to inform us after completing the erection work and wiring for commissioning the engine.
For the engine to function, there should be a diesel storage tank and service tank and control panel board with power cables. The appellant was already having the diesel storage tank, service tank, control panel board and power cables for its old generator. That generator developed trouble and totally failed on 18-3-1986. Therefore, as the diesel storage tank and electrical settings were already in existence though with reference to the old generator, it is the contention of the appellant that on the failure of the old generator the appellant gave temporary connection to the existing facilities and worked the new generator even though such working amounted to unauthorised use. Having regard to the electrical facilities which the assessee was already having and having regard to the expertise and experience the assessee possessed and taking note of the fact that the production has not fallen during the sickness of the old generator, it is reasonable to presume that the appellant has worked the impugned generator as a stop gap arrangement. Of course, the generator cannot be commissioned officially unless the clearance is obtained from the Inspector of Electricity attached to the Government of Kerala. Official clearance can be obtained only when there is pucca erection of the generator with permanent facilities and safety requirements for its operation. The warranty given by the suppliers will also commence only when pucca erection is made. This is evident from the warranty clauses issued by Kirloskar Cummins Limited (page 3 of the appellant's paper book) which are as follows :-
This Warranty does not apply to-
(i) any engine that shall have Any improper installation
been subject to overspeeding. or application, or any
misuse, negligence or acci- substitution of parts not
dent. manufactured or approved
(ii) any engine that shall have by us shall void all
been repaired or altered out- warranties, express or
side of our factory or by any- implied. We make no
one who is not authorised by warranty as to
us in such a way that, in our normal wear and tear,
sole judgment its perfor- nor do we agree to be
mance and reliability are ad- liable for loss of time
versely affected. to the user while the
engine or other equip-
ment is out of commission,
nor for any labour or othe
expenses, damage or loss
occasioned or claimed to
be occasioned by such
defective parts.
(iii)any engine or any part of an
engine improperly applied or
installed.
(iv) failure in any way resulting
from use of parts not manu-
factured or approved by us,
or
(v) normal maintenance services We make no warranty in
including but not limited to respect of starters,
engine tune up and the re- generators, transmissions,
pair or replacement of fitters. clutches, or any other
belts and other normal main- accessories not manufa-
tenance spares (please refer ctured by us. These are
Schedule 1). usually warranted by
their respective
manufacturers.
Any clam or obligation in
connection with the sale
of our engines shall
be subject to the
jurisdiction of the
Courts in Pune.
Therefore, the records with the suppliers and the service agents point to the fact that the generator was commissioned only on 10-6-1986. From this it cannot be inferred that it was only with effect from that date the machine was brought to use for the first time. In this view of the matter, we hold that the assessee is entitled to get deduction for depreciation and investment allowance subject to the fulfilment of other conditions for allowance under Section 32A of the Income-tax Act, 1961.
8. Since the claim of the appellant for depreciation and investment allowance is upheld by us, in respect of the new generator, we hold that there has been no concealment of income or particulars of income or erroneous claim for deduction put forward before the department and the penalty levied under Section 271(1)(c) ofthe Income-tax Act, 1961, on this count is cancelled. Even if a different view is taken on the claim for deduction of depreciation and investment allowance in respect of the comber and the new generator, penalty is not leviable for the reason that the appellant has furnished an explanation which it had substantiated through circumstantial and collateral evidence. There is no mens rea in the conduct of the assessee. If the explanation remains substantiated, no penalty is leviable under Section 271(1)(c) though such explanation was liable to be rejected by the assessing authority. Thus, in any view of the matter, penalty under Section 271(1)(c) cannot be sustained.
9. In the result, the appeals are allowed.