Income Tax Appellate Tribunal - Cuttack
Deputy Commissioner Of Income Tax vs Tata Refractories Ltd. on 13 September, 2004
Equivalent citations: (2005)92TTJ(CTK)1199
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the Revenue against the order of the learned CIT(A), dt. 7th June, 2002, for the asst. yr. 1990-91, in the matter of deletion of penalty imposed under Section 271(1)(c) of the IT Act amounting to Rs. 58,08,600.
The assessee has also filed a cross-objection alleging the order of the learned CIT(A) on various counts for his failure to record some particular findings.
2. The Revenue has taken the following five grounds of appeal:
(i) On the facts and in the circumstances of the case, the learned CIT(A) is not justified in law and on the facts in deleting the penalty of Rs. 58,08,600 levied under Section 271(1)(c) of the IT Act and holding the assessee's explanation as bona fide when the assessee had not furnished any conclusive document in support of installation and erection and when the assessee had, in its letter No. SE-50: 1229 dt. 25th Oct., 1990, to the District Industries Centre, Sambalpur, had stated the date of commissioning as 8th Oct., 1990.
(ii) On the facts and in the circumstances of the case, the claim of deduction under Sections 32 and 32A of the IT Act, 1961, on incorrect facts by the assessee-company, amounts to concealment as the scheme of law as envisaged in Section 271(1)(c)(iii) with its Expln. 1 clearly fits into the facts and circumstances of assessee's case and penalty rightly imposed.
(iii) The learned CIT(A) is not justified in law and on facts in relying on the decision of the Orissa High Court in the case of CIT v. Indian Metals & Ferro Alloys Ltd. (1995) 211 ITR 35 (Ori) when the said decision had applied pre-amendment concealment penalty law to distinguishable set of facts and circumstances whereas the relevant penalty law, i.e., Clause (B) under Expln. 1 to Section 271(1)(c) has undergone radical amendment w.e.f. 10th Sept., 1986.
(iv) The learned CIT(A) is not justified in law and on facts in ignoring the clear finding of the Cuttack Tribunal in ITA No. 615/Ctk/1992, ITA No. 621/Ctk/1992, i.e., the very same case that the machinery in question had been commissioned on 8th Oct., 1990 and installed on 28th Oct., 1991, well after the relevant previous year.
(v) Any other grounds will be pressed at the time of hearing.
3. We have heard the rival contentions, carefully gone through the orders of the authorities below and deliberated on the case laws cited by the learned Departmental Representative in the factual matrix of the case.
4. The brief facts of the issue are that in the course of assessment under Section 143(3), the assessee's claim for depreciation under Section 32 and investment allowance under Section 32A of the IT Act on 1150 KVA DG set was disallowed and, therefore, penalty proceeding under Section 271(1)(c) was initiated in the said assessment order. The learned CIT(A) vide his order dt. 18th Sept., 1992, confirmed the action of the AO that the DG set was not ready for use before the close of the financial year and hence, not eligible for depreciation allowance. The learned CIT(A) agreed with the assessee-company that the DG set was eligible for investment allowance in the instant case. In an appeal filed against the order of the learned CIT(A) before the Tribunal, the assessee's request to withdraw its appeal against the disallowance of claim of depreciation in respect of the DG set was accepted by the Tribunal. As per the AO, the assessee-company concealed the particulars of its income or furnished inaccurate particulars of such income so far as wrong claim of depreciation is concerned, for the asst. yr. 1990-91, it was requested to explain why penalty under Section 271(1)(c), Expln. 1 of the IT Act shall not be imposed. The assessee submitted that during the accounting year 1989-90, the assessee-company had installed and commissioned on 30th March, 1990 one 1150 KVA DG set of the value of Rs. 67,23,333 and its claim for depreciation and investment allowance on the machinery was also put forth. In support of the claim that machinery was installed and commissioned on 30th March, 1990, the assessee-company filed a copy of the handing over report wherein it was mentioned that the "trial run of the units has been taken and defects noted have been rectified". As the AO was not satisfied with the assessee's contention regarding DG set being put to use, the AO made enquiry in the office of Chief Electrical Inspector, Bhubaneswar. Pursuant to the enquiries conducted, the following facts emerged :
(a) Permission has to be obtained from the Orissa State Electricity Board for the installation of a DG set and,
(b) Terms and conditions as specified by Orissa State Electricity Board in the permission letter should be adhered to.
The assessee-company was accorded permission by the OSEB on 19th May, 1987 under Section 44 of the Electricity (Supply) Act, 1948, to install a 1150 KVA DG set. While granting permission, certain terms and conditions were specified some of which are reproduced as under:
Condition No. 4:
The installation should be subject to inspection by the respective field Superintendent Engineer, Electrical/EE, Electrical Inspector, Orissa, Bhubaneswar or their Authorised Representatives and to comply with the requirements as indicated by them.
Condition No. 6:
The energy meter duly tested should be installed near the diesel engine for recording the energy generated and consumed. The meter should be duly sealed by the concerned Assistant Electrical Inspector.
Condition No. 7 :
The installation should be energised only after written permission of Electrical Inspector, Orissa or his Authorised Representative.
Condition No. 8:
The installation drawing should be approved by the Electrical Inspector before actual installation of the set.
5. After conducting the above enquiries, the AO found that the DG set can be energised only after the written permission from the Chief Electrical Inspector (C.E.I.) Orissa. This presupposes inspection of the installation of the DG set by the CEI or any other officer duly authorised by him before granting permission for energisation. According to the AO, the first inspection was carried out by the Electrical Inspector on 21st April, 1990, which was followed by the inspection carried out by the CEI, Orissa, Bhubaneswar on 26th Sept., 1990. Based upon the compliance report furnished by TRL with relation to the defects pointed out in these two inspection reports, the CEI finally permitted energisation of the DG set only on 28th Oct., 1991. As the DG set is said to have been commissioned only after the same is energised and as the written permission for energisation was given by the CEI only on 28th Oct., 1991, the AO found that the claim of the assessee-company that the DG set unit was commissioned on 30th March, 1990, was incorrect. Thus as per the AO, the second condition of Section 32 regarding use of the depreciable asset in the business of the assessee was not complied with, there must be actual, effective and real use in the commercial sense and the use must be so linked with the business that there is an immediate nexus between the user and the business. The AO, therefore, reached to the conclusion that in the case of the assessee-company it has been conclusively established that "the asset in question was not used in the previous year relevant to the assessment year under consideration and, therefore, depreciation was not admissible".
6. The AO thereafter gave para-wise reply of the submission of the assessee from pp. 4 to 12 of his order and also considered the case laws cited by the assessee. Thereafter, the AO reached to the conclusion that the scheme of the law as envisaged under Section 271(1)(c)(iii) with its Expln. 1 clearly fits into the facts and circumstances of this case. Considering the nature and gravity of the case, penalty at the maximum rate be imposed. He, therefore, imposed penalty at the rate of 300 per cent of the tax sought to be evaded on account of wrong claim of depreciation.
7. By the impugned order, the learned CIT(A) deleted the penalty by observing as under:
"I have considered the grounds of appeal, the penalty order, the arguments of the Authorised Representative and the AO on various dates of hearing. The point for determination is whether the appellant has concealed the particulars of income or furnished inaccurate particulars of such income. For this purpose, the Expln. 1 to Section 271(1)(c) of the Act is to be examined in depth keeping in view the law laid down by the various Courts particularly the jurisdictional Tribunal and Orissa High Court. The Hon'ble Orissa High Court in the case of CIT v. Indian Metals & Feiro Alloys Ltd. (1995) 211 ITR 35 (Ori) has upheld the order of the Tribunal, Cuttack Bench, Cuttack, in deleting the penalty under Section 271(1)(c) of the Act. The facts of the Indian Metal & Feno Alloys' case (supra) is similar to that of the appellant. In the said case, in the financial year ending 31st Dec, 1973, the assessee (IMFA Ltd.) claimed commissioning of certain new plant and machinery on 27th Dec, 1973, and claimed depreciation and development rebate. The AO after investigation found that the actual commissioning of the plant was not during the said accounting year and accordingly depreciation and development rebate claimed were disallowed. The said disallowances were also upheld by the appellate authorities. Based on the assessment order, penalty under Section 271(1)(c) of the Act was imposed by concluding that IMFA has concealed or furnished inaccurate particulars of income. The Hon'ble Tribunal examined the matter and held as follows. The claim of IMFA did not indicate that the assessee was entitled to depreciation and development rebate but only indicated that it was a mere claim before the IAC (Asst.) who was to decide whether the claim of the assessee was entertainable or not. By claiming the amount of depreciation and development rebate, the assessee did not conceal any income. The Hon'ble Tribunal found that for the subsequent year, depreciation and development rebate have been allowed to the assessee by the AO. Therefore, it was ultimately concluded that assessee had neither concealed nor filed inaccurate particulars of income. The Hon'ble Tribunal cancelled the penalty.
The Hon'ble Tribunal also examined the question whether the penalty was sustainable in view of the Explanation to Section 271(1)(c) of the Act. It was noticed that for the subsequent year the development rebate and depreciation had been allowed to the assessee by the AO. Therefore, the negative onus which was upon the assessee was held to have been duly discharged by putting up the legal claim before the AO. It was ultimately concluded by the Hon'ble Tribunal that the assessee neither, concealed the income nor filed inaccurate particulars of income. The Hon'ble Tribunal, therefore, concluded that the assessee's claim was bona fide and, therefore, notwithstanding disallowance of the claim during the assessment, penalty was not imposable. The Hon'ble Orissa High Court while approving the decision of the Hon'ble Tribunal held as under:
(a) If in the facts and circumstances of a particular case and on the materials before it, the Tribunal reaches the conclusion that there was no concealment and/or furnishing of inaccurate particulars, it is a conclusion on facts and no question of law arises from the order of the Tribunal in that regard.
(b) Whether there was concealment or not is ordinarily a question of fact. Where a fact-finding body bearing in mind the correct principles comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact. Similarly whether the explanation offered by the assessee was bona fide or not is a question of fact.
(c) Tribunal was justified in concluding that assessee's claim was bona fide and, notwithstanding disallowance of the claims during the assessment, penalty was not imposable.
The Hon'ble Orissa High Court, therefore, decided the case in favour of the assessee. This means under similar facts and circumstances as that of the appellant, Hon'ble Tribunal, Cuttack Bench, Cuttack, has held that there was no concealment of income nor furnishing of inaccurate particulars of income.
In the appellant's case, it has been claimed that the DG set was commissioned on 30th March, 1990, and the same was put to use on 30th and 31st March, 1990. Accordingly depreciation and investment allowance were claimed. The AO found that the permission for energisation of DG set was given by OSEB on 8th Oct., 1990 and accordingly held that without such permission DG set could not have been put to use. Both the claim of depreciation and investment allowance were disallowed and penalty proceedings were initiated ending with levy of penalty. The appellant's case is exactly similar to that of Indian Metal & Ferro Alloys Ltd. (supra). As in the case of IMFA (supra) it can be said that the appellant has made a claim although the AO has decided not to allow the same during the year based on the facts and circumstances of the case. In view of the decision of the Hon'ble Tribunal in the case of IMFA (supra) and order of Hon'ble Orissa high Court, by claiming the amount of depreciation and investment allowance, the appellant cannot be treated as concealing its particulars of income or furnishing of inaccurate particulars of such income. The AO has assumed that without the permission of the OSEB, DG set cannot run. The fact remains that the appellant all along has contended at the time of assessment proceedings and at the time of penalty proceeding that without the formal permission it has run the DG set on 30th March, 1990 and 31st March, 1990. The said contention has not been proved to be either bogus or false.
It will be essential to examine whether penalty is sustainable in view of Expln. 1 to Section 271(1)(c) of the Act. For the purpose, it will be appropriate to quote the Explanation as under:
"Where, in respect of any facts material to the computation of the total income of any person under this Act.---
(A) such person fails to offer an explanation or offers an explanation which is found by the AO or the CIT(A) to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income has been disclosed by him, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."
As per above, it is to be seen whether the appellant has furnished explanation which is bogus or false at the time of assessment proceedings leading to determination of income. In its explanation, the appellant claims that the generator has been installed and has been used in last 2 days of the accounting year. The claim of installation is supported by the following facts :
(1) Permission from Government for installation;
(2) Approval of drawing;
(3) Erection of the generator;
(4) Testing of meter;
(5) First inspection of generator in April, 1990 before giving permission for energisation. In the report arising out of the inspection, nothing has been said about the technical aspect or the core issue of installation. Only minor issues have been pointed out for rectification.
(6) Running of the generator pending receipt of the permission from the Chief Electrical Inspector.
The above facts which were submitted by the appellant before the AO at the time of assessment and penalty proceeding have not been held to be bogus or false.
The appellant has claimed that it has run the generator in the last two days of the year and the power has been fed to the system for use. This is supported by internal reports, consumption of fuel, record in the log book, note of the technical personnel and audit report. The appellant has also informed the Electrical Inspector that due to severe power restriction imposed by OSEB it has become essential to run the generator set pending completion of formality. These facts have not been found to be false.
The AO has held that the generator has not been put to use as statutory clearance has not been given. The appellant has never stated before the AO that final clearance has been given during the year. It was contended before the AO that it has used the generator even without permission and this has been duly informed to the Chief Electrical Inspector. Based on the said use, depreciation and investment allowance had been claimed. These facts are neither incorrect nor bogus.
The AO, while disallowing depreciation and investment allowance, has held that the condition of put to use has not been satisfied because of want of statutory permission. Nowhere the claim of use of generator on last two days have been disputed. Disallowance of depreciation and investment allowance have been upheld by appellate authorities on the ground that statutory permission for energisation was not given during the year. The generator, therefore, has been treated as not being used during the year but in the subsequent year on receipt of permission. In the whole issue, the dispute is mainly on the use of generator rather than its installation. For the purpose of penalty, the explanation submitted by the appellant are to be seen and not the actual fate of the claim made by the appellant. Even though the depreciation and investment allowance have not been allowed, the explanation submitted by the appellant have not been proved to be false or bogus.
Coming to the question of use of generator, it can be seen that this has been procured basically as a stand-by machine to supply power when there is no power from the main system. The generator may not be used for the whole year even then the depreciation will be allowable for its passive use. Even though the depreciation and investment allowance have not been ultimately allowed, for valid reasons, the claim made by the appellant under the circumstances is a bona fide one.
From the above, it is found that the appellant has not failed to offer an explanation. The explanation offered is also not found to be false. The appellant has also been able to prove that the explanation offered is bona fide and all the facts relating to computation of its total income have been disclosed at the time of assessment proceedings and penalty proceedings. Hence, appellant is not covered under Expln. 1 to Section 271(1)(c) of the Act for which penalty is not sustainable.
In view of Hon'ble Orissa High Court's decision on the issue in the case of CIT v. Indian Metal & Ferro Alloys Ltd. (supra), it is not necessary to look for decisions of other High Courts. Keeping in view the said decision, order of jurisdictional Tribunal in the case of IMFA Ltd. (supra) and facts of the appellant's case, it can be said that the appellant is not guilty of concealing the particulars of its income or furnishing of inaccurate particulars of such income. The AO is therefore not justified to levy concealment penalty. Penalty imposed at Rs. 58,08,600 is accordingly deleted".
8. Aggrieved by the above order of the learned CIT(A), the Department approached us for further adjudication.
9. It was vehemently argued by the learned CIT (Departmental Representative) that the most crucial document placed on record, i.e., letter dt. 20th March, 1990, from Shri P.K. Patel, Superintendent (electrical) of the assessee-company to the Dy. Electrical Inspector, Government Testing Laboratory, clearly establishes that testing of the correctness of the meter is required before the commissioning of the DG set and this is assessee's own admitted position. Hence, the pertinent question is when did the assessee know the correctness of the meter from the Dy. Electrical Inspector ? For an answer, he referred to pp. 96 and 97 of the assessee's paper book and stated that these two pages contain the test report for the electricity meter in question. This report says that the meter was tested on 29th March, 1990 but the report is actually dt. 12th April, 1990. Thus as per learned CIT (Departmental Representative), the test report of the meter itself which is dt. 12th April, 1990 was well after the end of the previous year in question. This test report certifying the correctness of the meter must have been communicated to the assessee only on or after 12th April, 1990. He, therefore, drew our attention to the fact that the learned Authorised Representative of the assessee while saying that the meter was tested on 29th March, 1990, has conveniently ignored the date of the meter test report which is 12th April, 1990. He thus emphasised that in the face of the test report dt. 12th April, 1990, it cannot be said that the assessee ascertained the correctness of the meter by 31st March, 1990, i.e., much before the date of test report.
10. He thus tried to emphasise that the correctness of the meter is such an inextricable element, that without it, we cannot conceive the DG set in question to have been in readiness for passive user, let alone commissioning or trial run.
11. He also drew our attention to the assessee's letter dt. 20th April, 1990, to Shri Manoj Mohanty, Electrical Inspector, which is a request from the assessee to the competent authority for permission to run the DG set provisionally. Accordingly to the learned CIT (Departmental Representative), this letter itself would mean that even as late as 20th April, 1990, the assessee was seeking permission for running the DG set provisionally. He drew our attention to the first para of this letter in which it was stated that "this job is already completed and commissioned" without specifying which job and on what date? The subject of this letter, as stated in the beginning of the document is "inspection of 1150 KVA DG set". According to the learned CIT (Departmental Representative), admittedly no inspection of the said equipment had taken place till the date of this letter, i.e., 20th April, 1990. According to the learned CIT (Departmental Representative), in fact, it was only in response to this letter of the assessee that the first inspection of the, equipment had been carried out on 21st April, 1990. In para 13 of the inspection document, the electrical installation work of the DG set was found incomplete on the date of inspection, i.e., 21st April, 1990. He further submitted that the learned Authorised Representative of the assessee has misleadingly stated on p. 211 of his paper book under entry dt. 20th April, 1990 that the assessee had informed the competent authority about the installation and commissioning of the DG set in the letter dt. 20th April, 1990. He further submitted that the assessee's letter dt. 20th April, 1990 talks of the approval of electrical drawing for the DG set. Thereafter, this letter uses the words "this job" which would mean and refer to electrical drawing in the context. Thereafter it envisages about the jobs carried out in connection with the DG set listing items 1 to 6. In this list, the word "installation" has been used, but there is absolutely no specific mention of any commissioning or trial run. Thereafter, in the last para, it alleges severe power restrictions imposed by OSEB and states that in view of such restriction it has become "essential" to run the set provisionally, that too if the electrical authorities allow for the same. It is not strange that even in a letter dated as late as 20th April, 1990, there is not even a whisper of any trial run. It is the assessee's claim that the DG set had run on 30th March, 1990 and 31st March, 1990. As per learned CIT (Departmental Representative), this type of silence and omission is extremely significant and by any stretch of imagination, this particular letter cannot be treated as suggesting that the DG set had been commissioned and installed by 31st March, 1990. Thus he emphasised that no mention of such dates, i.e., 30th March, 1990 or 31st March, 1990, in the assessee's letter dt. 20th April, 1990, clearly indicate that there was no installation as well as commissioning of the DG set. As per learned CIT (Departmental Representative), it is clear and evident as late as 20th April, 1990, the assessee was seeking for permission even for provisional running, and all these facts put together certainly establish that there would have been no trial run nor commissioning nor even readiness for passive user by 31st March, 1990.
12. The learned Departmental Representative further submitted that the admitted facts on record regarding purchase and own generation of electricity in the month of March, 1990, this fact totally belies the assessee's claim that there was power restriction or power cut in the month of March, 1990 which precipitated it to install and commission the new DG set (1150 KVA). Drawing our attention to the figure of the assessee's own generation in the month of March, 1990, the learned CIT (Departmental Representative) submitted that the assessee's own generation was only 15640 units compared to its own generation of 36500 units in the beginning of the financial year, i.e., in April, 1989. Thus as per the learned CIT (Departmental Representative), the assessee, not taking into account the new 1150 KVA DG set, had capacity to generate as much as 36,500 units in April, 1989. The fact that the assessee generated in March, 1990 even less than 50 per cent of its generation in April, 1989 goes to establish that the assessee had no need of further generation than 15640 units in March, 1990. It had sufficient pre-existing capacity to generate double this figure even without the aid of the new 1150 KVA DG set which was meant in any case to be a stand-by unit. Thus, as per learned CIT (Departmental Representative), the assessee's plea of severe power restriction or power cut is found to be totally baseless, unsubstantiated, unfounded and imaginary.
13. The learned CIT (Departmental Representative) also drew our attention to the crucial document which is permission letter dt. 19th May, 1987 from Shri B.P. Mishra, Chief Engineer and Member (TDC), OSEB, Bhubaneswar, to the assessee. As per learned CIT (Departmental Representative), this document listed three very critical and important conditions as follows :
(i) The installation should be subject to inspection by the Electrical Inspector, Orissa, Bhubaneswar or their Authorised Representatives and should comply with the requirements as indicated by them.
(ii) The set will work as a stand-by set only and may be run during power failure/restrictions only.
(iii) The installation shall be energised only after written permission of Electrical Inspector, Orissa, or his Authorised Representatives.
14. In view of the above, the learned CIT (Departmental Representative) submitted that the electricity authorities had made installation subject to their inspection. The first inspection by the electricity authorities occurred on 21st April, 1990. In the fact of this critical precondition and fact, as per learned CIT (Departmental Representative), it cannot be said that the equipment in question had been installed by 31st March, 1990. As per learned CIT (Departmental Representative), if we say so, we render the pre-condition stipulated by the electrical authorities null and void. When we are considering a matter in law the legal tenability of a claim, does it behove us to accept a claim when such acceptance means disregard and contravention of other statutory norms and provisions laid down by legally constituted authorities. In reply to the assessee's plea for running of the generator without getting formal certificate or the stipulated inspection by the electrical authorities, at the assessee's risk of shutting down of the unit, the learned CIT (Departmental Representative) submitted that it is inconceivably strange that the assessee which had in right earnest imported the equipment in question in order to have capacity for generation of necessary power, should violate the electrical stipulations risking closure of the unit.
15. As per learned CIT (Departmental Representative), the second important condition laid down by the electrical authorities was that the installation would be energised only after written permission of the Electrical Inspector, Orissa, or his Authorised Representatives. Against this serious pre-condition, the assessee wants the Department to accept that the installation was energised without such written permission. He further drew our attention to the letter dt. 9th May, 1991 from the Assistant Electrical Inspector, Sambalpur to the assessee, according to which the DG set in question had been commissioned on 8th Oct., 1990 and this is the date from which the assessee had claimed exemption in respect of duties. Now, in the face of this document, as per learned CIT (Departmental Representative), can we say this that the DG set had been commissioned on 31st March, 1990 ? He has also drawn our attention to the order of the Tribunal, Cuttack Bench in the quantum appeal in the very same case for the same assessment year holding that the date of commissioning was long after 31st March, 1990.
16. The learned CIT (Departmental Representative) has also drawn our attention to the third condition imposed by the electrical authorities to the effect that the DG set would be run only during power failure or power restrictions and it was to be used as a stand-by unit. By again drawing our attention to the comparative table as given at p. 5 of his written submissions regarding details of monthly purchase of power, vis-a-vis monthly generation of power, he tried to emphasise that there had been no power restriction or power cut during March, 1990, so as to persuade the assessee to commence the generating set for generation of deficit power.
17. The learned CIT (Departmental Representative) also highlighted the invalidity of the erection and commissioning certificate dt. 9th Sept., 1992 as given by M/s Kanubhai Engineers Ltd., by submitting as follows :
"The learned Authorised Representative of the assessee has made great play of the erection and commissioning certificate dt. 9th Sept., 1992, as given by Kanubhai Engineers Ltd. to the effect that the DG set in question had been erected by them and commissioned on 30th March, 1990. Unfortunately for the assessee, this certificate is invalid and untenable in law for the following reasons :
(a) Vide Annex. 4, which is a document containing details of plant and machinery on which investment allowance was claimed for the relevant assessment year as submitted by the assessee in the course of assessment proceedings. Serial No. 1 gives details and break up of the total cost of the DG set in question, i.e., Rs. 67,23,333. Under serial No. 1, item No. (viii) (high lighted) lists erection and commissioning charges in favour of M/s Kanubhai Switch Gears (P) Ltd. at Rs. 1,69,427.45.
(b) In other words, as per the document submitted by the assessee, i.e., Annex. 4 erection and commissioning had avowedly been done by M/s Kanubhai Switch Gears (P) Ltd., not M/s Kanubhai Engineers Ltd. Going by the name 'Kanubhai', both the concerns might be sister-concerns, but M/s Kanubhai Switch Gears (P) Ltd., being a company has to be accepted as a separate legal entity. Hence, the erection and commissioning certificate should have been procured from M/s Kanubhai Switch Gears (P) Ltd. The assessee has not done this. The assessee has simply procured an erection and commissioning certificate from M/s Kanubhai Engineers Ltd. who had evidently no competence to give such a certificate. Hence, the erection and commissioning certificate dt. 9th Sept., 1992 as produced by the assessee deserves to be rejected.
18. With regard to the query of the Bench as to why the AO did not examine M/s Kanubhai Engineers Ltd., the learned CIT (Departmental Representative) submitted as under:
(i) The date of the erection and commissioning certificate as given by M/s Kanubhai Engineers Ltd. is 9th Sept., 1992, which is long after the completion of the assessment proceedings. It may be appreciated that the date of the assessment order is 26th March, 1992. In other words, the so-called erection commissioning certificate from M/s Kanubhai Engineers Ltd. (vide p. 93 of the assessee's paper book, i.e., index of papers) had never been produced by the assessee before the AO in course of assessment proceedings.
(ii) The said certificate is entirely invalid and unsustainable in law since M/s Kanubhai Engineers Ltd. had no evident competence to issue such a certificate. Admittedly, it was M/s Kanubhai Switch Gears (P) Ltd., i.e., another company which had allegedly received the erection and commissioning charges. The assessee at no stage, i.e., neither during assessment proceedings nor during penalty proceedings had produced any erection commissioning certificate from M/s Kanubhai Switch Gears (P) Ltd.
(iii) The AO through his inquiries with the electrical authorities had collected overwhelming evidence which had disproved the assessee's claim of erection and commissioning by 31st March, 1990.
(iv) An inspection of the document under Annex. 4, shows intriguing features as under:
(a) Under serial No. 1 (relating to the DG set in question) against the items listed at (i) to (iv), the corresponding parties' invoice numbers have been given, but against item No. (viii) (i.e. erection commissioning charges) the corresponding party's invoice number has not been given. Similarly against items Nos. from (ix) to (xi), no invoice number has been given. These are described as running bills. All these reinforce the inference of falsity of the assessee's claim that the DG set had been erected and commissioned by 31st March, 1990.
19. It was further vehemently argued by the learned CIT (Departmental Representative) that it is the assessee's case that the handing over report in respect of the new DG set had been signed on 30th March, 1990, and handed over to M/s Kanubhai Engineers Ltd. (vide p. 90 of assessee's paper book, i.e., index of papers), that once flawless performance is established, the assessee-company was to issue handing over certificate to M/s Kanubhai Engineers (kindly see pp. 79-82 of paper book, more particularly paras 1A, 6, 8 and 10) this is extracted from the assessee's written arguments, i.e., 3c. In this context, the most crucial document is Annex. 1 to the letter of intent for turnkey erection (vide p. 83 of the assessee's paper book, i.e., index of papers). Annex. 1 is described 'guarantee-performance/parameters of the diesel generating set'. It is in place to extract certain very material and vital portions which are as under:
I. (1)(a) Output : This can be demonstrated for a period of six continuous days (144 hours) running.
II. (3) Fuel Oil Consumption : For checking the fuel oil consumption, the set will run at 920 KW of 0.8 p.f. continuously for 4 hours (to be repeated over a period of 6/7 days).
III. (7) Starting : (i) xxxxxxx
(ii) The generator would be able to start within 60 secs. of the tripping of power and would take the full connected load. For this purpose, deliberate tripping would be carried out for 2 times in a shift for 6/7 days while performance is being oversed against item (i) above.
From the above extracts, one important fact clearly emerges which is that the functioning of the DG set was to be demonstrated and observed over a period of 6/7 days by M/s Kanubhai Engineers Ltd. and it was only after this prolonged observation and demonstration, the machine was meant to be handed over to the assessee-company. Going by the so-called log book maintained by the assessee and the assessee's explanation to the penalty notice vide p. 2 of Annex. 1, the DG set had run for two hours forty minutes on 30th March, 1990 and two hours fifteen minutes on 31st March, 1990. It is the assessee's case that the handing-over certificate of M/s Kanubhai Engineers Ltd. was executed on 30th March, 1990. Is not it strange and totally inconceivable that as against the agreed precondition and stipulation of a period of Observation and demonstration of six to seven days, the so-called handing over certificate should have been executed with the alleged evidence of running just for two days and that too just for a total of five hours. In view of the turnkey erection agreement and the stipulated guarantee and pre-conditions, the machine in question could not have been handed over by 31st March, 1990. By 31st March, 1990, the assessee could not certainly have taken over the machine from M/s Kanubhai Engineers (P) Ltd., let alone going for trial run or commissioning. These facts reinforce the inference of falsity of the assessee's claim.
All the facts and circumstances discussed in the foregoing paragraphs cumulatively establish that the DG set in question was neither in readiness for passive user nor had it been commissioned or put to trial run by 31st March, 1990. All the documentary evidence on record are totally inconsistent with the assessee's claim that the machine had been installed and commissioned by 31st March, 1990.
20. The learned CIT (Departmental Representative) further contended that in the penalty proceedings, the assessee had offered-its explanation under Annex.-1. The AO examined the assessee's explanation in depth in the light of the legal provision, i.e., Expln. 1(B) under Section 271(1)(c) of the IT Act, 1961, and came to the conclusion that levy of penalty was attracted to the case. Accordingly, the AO levied the maximum penalty of 300 per cent, i.e., Rs. 58,08,600. In the first appeal by the assessee, the CIT(A) deleted the penalty. The CIT(A) completely misdirected himself in interpreting the penalty law and entirely misconceived the Expln. 1(B) under Section 271(1)(c). The CIT(A)'s order is perversity writ large which is evident as under:
(i) Contrary to the intent and purport of Expln. 1(B) under Section 271(1)(c), he put the cart before the horse by placing the initial burden on the AO to prove falsity and concealment which is evident in his language such as : the assessee's claim of installation supported by various facts has not been proved to be bogus or false; even though the depreciation and investment allowance have not been allowed, the explanation submitted by the appellant has not been proved to be false or bogus; the explanation offered is also not found to be false, the appellant has also been able to prove that the explanation offered is bona fide; the assessee's contention has not been proved to be either bogus or false; The AO has assumed that without the permission of the OSEB, the DG set cannot be run.
In the context of the penal proceedings, two pivotal questions arise : (a) what is the assessee's explanation; (b) whether the assessee's explanation meets the test laid down in the Expln. 1(B) under Section 271(1)(c) ?
First, a look at Expln. 1(B) under Section 271(1)(c) is in place. It reads as under:
"Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) xxxxx (B) Such person offers an explanation which he is not able to substantiate (and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him), Then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of Clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed."
It is in place to mention that the bracketed portion represents a radical amendment which came into effect from 10th Sept., 1986. This amendment clearly spells out that the initial burden is on the assessee to prove the bona fide of his explanation and to further prove that all the facts relating to the explanation and material to the computation of his total income have been disclosed.
Now, what is the nature of this initial burden lying on the assessee and what can be the basis of its discharge ? In the context of these questions, the observations made by his Lordship Justice A. Pasayat (at the material time Justice of Orissa High Court) in the case of CIT v. Prathi Hardware Stores (1993) 203 ITR 641 (Ori) are eminently quotable :
"The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation; it should not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he had concealed the income or furnished inaccurate particulars thereof is available to be drawn."
"The principal logical import of the explanation is to shift the burden of proof from the Revenue on to the assessee. The rebuttal must be on materials relevant and cogent. It is plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is offered, the burden placed would be discharged and the presumption rebutted. As pointed out by the apex Court in CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC), the burden placed upon the assessee is not discharged by any fantastic explanation."
"A further condition was imposed w.e.f. 10th Sept., 1986, with which we are not concerned."
It was observed in the said case that the onus can be discharged by a preponderance of probabilities.
The learned Departmental Representative further submitted that unfortunately, both the CIT(A) and the learned Authorised Representative of the assessee have been misdirected and unwittingly considered the issue of concealment under Expln. 1(A). It is only under Expln. 1(A) that an AO has to necessarily find an explanation offered by an assessee to be false before levying penalty. But Expln. 1(A) is an entirely different matter from Expln. 1(B).
Further, the Hon'ble Supreme Court in the case of K.P. Madhusudhanan v. CIT (2001) 251 ITR 99 (SC) had occasion to consider Expln. 1(B) and upheld the action of the AO in levying concealment penalty in that case. The Supreme Court had also pointed out that Expln. 1(B) has put the initial burden on the assessee. This judgment of the Supreme Court dt. 21st Aug., 2001 is a three-Member Bench judgment. Similarly, the Hon'ble Supreme Court in the case of B.A. Balasubramaniam & Bros. Co. v. CIT (1999) 236 ITR 977 (SC) upheld the levy of penalty by holding that the assessee had not been able to discharge the onus placed on it by the Explanation to Section 271(1)(c) of the IT Act, 1961.
The learned Departmental Representative further submitted that the learned Authorised Representative has invoked and misplaced reliance on the decision of the Hon'ble Supreme Court in the case of K.C. Builders and Anr. v. Asstt. CIT (2004) 265 ITR 562 (SC). By relying on this decision, the learned Authorised Representative has contended that mens rea and deliberate intention to conceal must be proved by the Revenue. This contention of the learned Authorised Representative is not tenable for the following reasons :
(a) The assessment years mentioned in the case of K.C. Builders (supra) are 1983-84 to 1986-87 which means that the radical amendment brought about under Expln. 1(B) w.e.f. 10th Sept., 1986 would not be applicable to the said assessment years.
(b) Explanation 1(B) has not at all been considered by the Supreme Court in the said decision.
(c) The Supreme Court in that case was simultaneously concerned with prosecution matters.
(d) In the said decision among the cases referred to, the decision of Supreme Court in the case of K.P. Madhusudhanan (supra) does not find a mention at all nor for that matter, the decision of the Hon'ble Supreme Court in the case of B.A. Balasubramanium (supra). Hence, these two decisions continue to be good law.
(e) Moreover, when the radically amended Expln. 1(B) w.e.f. 10th Sept., 1986, has categorically and unambiguously put the initial burden upon the assessee to prove the bona fide of his explanation, to say that the Revenue should prove mens rea or deliberate intent would be contradictory and tantamount to invoking the ratio in the case of CIT and Anr. v. Anwar Ali (1970) 76 ITR 696 (SC) long since held by the Hon'ble Supreme Court as bad in law.
(f) In fact, all the legal decisions cited by the learned Authorised Representative of the assessee in two bulky volumes are entirely inapplicable to the case in hand since all these cases pertain to the pre-amendment period, i.e., before the amendment came into effect from 10th Sept., 1986. Hence, it would be totally redundant and a meaningless exercise to discuss any of the cases cited by the learned Authorised Representative. In fact, the learned Authorised Representative has repeatedly made misleading attempts to assert that the amendments made in 1964 and 1976 are similar to the amendment made w.e.f. 10th Sept., 1986. It may be appreciated that the language "fails to prove that such explanation is bona fide" brought into Expln. 1(B) w.e.f. 10th Sept., 1986, is radically different from the language used in the amendments brought about in 1964 and 1976.
21. The learned CIT (Departmental Representative) further submitted that in the present case, the assessee grossly failed to meet the test laid down in Expln. 1(B) of Section 271(1)(c) and that the explanation given by the assessee was not bona fide which is as per material on record. To put his argument further, he submitted as follows :
"In support of its explanation that the DG set had been installed and commissioned by 31st March, 1990, the assessee had offered an 'erection and commissioning certificate' dt. 9th Sept., 1992 from M/s Kanubhai Engineers Ltd. Now, is that a bona fide act or explanation ? Certainly not. Because, it is not M/s Kanubhai Engineers Ltd. to whose account erection and commission charges were debited but it is another concern, i.e., M/s Kanubhai Switch Gears (P) Ltd. to whose account the assessee had debited erection and commission charges as per the statement of details furnished under Annex. 4. This being the case and the assessee having full knowledge about this fact, the furnishing of erection and commissioning certificate by the assessee from a non-connected and not-competent concern called M/s Kanubhai Engineers Ltd. is certainly the reverse of bona fide.
Further, in support of its explanation, that the machine had been commissioned by 31st March, 1990, the assessee had stated that the very material meter had been tested on 29th March, 1990. The assessee also categorically admitted in the letter dt. 20th March, 1990 that ascertainment of the correctness of the meter is a precondition to be satisfied before the commissioning of the DG set. The assessee all along had knowledge that the test report in respect of the meter was dt. 12th April, 1990, i.e., well after the close of the relevant accounting period. It is only in this report dt. 12th April, 1990 that the correctness of the meter had been certified. Nevertheless, the assessee repeatedly insisted before the assessing authorities that the meter had been tested on 29th March, 1990. Other than the meter test report dt. 12th April, 1990, there is no other document nor any other piece of evidence to establish that the assessee had been communicated the correctness of the meter by 31st March, 1990. Hence, there is absolutely no basis for the assessee to say that the correctness of the meter had been known to it by 31st March, 1990 so that it was able to commission the DG set by 31st March, 1990. This claim is tantamount to falsehood. The meter is such a crucial component and its correctness is such a critical precondition for commissioning, as explicitly admitted by the assessee in its letter dt. 20th March, 1990 (vide p. 94 of paper book index of papers) that one cannot conceive of even passive user of the machine unless and until the meter was fixed to make the machine complete. Since the electricity authorities prepared the test report of the meter only on 12th April, 1990, it would be inconceivable that the meter could have been used before that date, i.e., 12th April, 1990.
In its explanation that the DG set had been commissioned by 31st March, 1990, the assessee, by way of justifying circumstances, had time and again insisted that severe power restrictions compelled them to run the DG set on 30th March, 1990 and 31st March, 1990. But, this plea of severe power restriction is completely belied by the details of monthly purchases of power as well as details of monthly own generation of power as brought out in the foregoing para Nos. 11 and 12.
In support of its explanation that the DG set had been commissioned by 31st March, 1990, the assessee has brandished a letter dt. 20th April, 1990 saying, without any basis discernible in the letter itself, that it had informed in the said letter about the provisional running of the DG set and commissioning of the DG set. The language used in the letter even remotely does not support such a claim unless one is prepared to distort and make a biased interpretation of the said letter.
The assessee did not bring to the notice of the AO that the electricity authorities had taken 8th Oct., 1990 as date of commissioning of the machine (vide Annex. 3). Further, in its reply dt. 19th March, 1992 to the queries raised by the AO, it cavalierly asserted that stipulations of Government agencies are not necessary for installation or trial run of the DG set. Now, can this type of explanation be described as bona fide ? Certainly not. Despite knowing fully well that the stipulations and preconditions laid down by OSEB are meant for strict adherence and their inspection is an inescapable precondition, the assessee attempted to hoodwink the AO by such explanation.
Further, such is the nature of the assessee's explanation and such are the documents relied upon by it, one has to make a very large number of assumptions and presumptions, as brought out at length in the foregoing para No. 21, in order to be able to accept the assessee's explanation. These facts certainly suggest the reverse of bona fide.
It is clear and evident in view of the immediately preceding 33 to 39 paragraphs that the assessee has not only furnished inaccurate particulars but also has miserably failed to prove that its explanation is bona fide and further failed to prove that all the facts relating to explanation and material to the computation had been disclosed by it. A misleading contention canvassed by the learned Authorised Representative is that the assessee's case is on all fours with the decision of the Hon'ble Orissa High Court in the case of CIT v. IMFA (supra). The CIT(A) had also relied upon this decision in deleting the penalty. A perusal of the decision shows that the facts of that case are entirely different from the facts of the present case as under:
(a) The assessment year in that case was 1974-75 and hence well beyond the pale of the radically amended Expln. 1(B) brought into effect from 10th Sept., 1986. The Hon'ble Orissa High Court did not have occasion to consider the radically amended Expln. 1(B) in that case, but to the present case the amended Expln. 1(B) is applicable.
(b) In that case, the assessee had filed revised returns three times either withdrawing some wrong claim or making some omitted claim. In the present case, the assessee has not filed any revised returns.
(c) In that case, the fact of trial production had been reflected in the annual general report of the company. This particular fact had weighed a lot with the Judges. But, in the present case, there is not even a whisper of any kind about the 1150 KVADG set.
(d) In that case, the assessee, in one of the revised returns, had withdrawn the claim of deduction under Section 80J after realising that such claim was erroneous. This fact had also impressed the Judges. The present case is totally devoid of any such feature.
(e) As far as facts are concerned, the assessee in that case had put all the cards before the authorities, but in the present case, the assessee's conduct in furnishing facts and explanations to the authorities has been the reverse of the bona fide as brought out in the foregoing paragraphs numbered 34 to 39.
(f) In fact, the CIT(A) has made a very perverse observation that the AO had assumed that the DG set cannot be run without permission from the OSEB. In actual fact, it is the CIT(A) who has completely ignored the OSEB letter dt. 19th May, 1987 and who has also forgotten that a lawful authority, while considering issues and matters under any law, should not take cognizance of any claim implying contempt disregard or contravention of other statutory norms, conditions and procedures laid down by legally constituted authorities."
22. In view of the above vehement arguments, the learned CIT (Departmental Representative) submitted that the order passed by the learned CIT(A) is palpably perverse and illegal which deserves to be quashed and the penalty order of the AO should be restored to meet the ends of justice.
23. On the other hand, the learned Senior Authorised Representative, Mr. N.K. Poddar, vehemently argued that as per the document and evidence furnished before the lower authorities, the assessee-company has satisfactorily explained the reasons for putting forth the claim of depreciation and had also substantiated bona fide of the claim and that all the facts relating to the same and material to the computation of his income have been disclosed by the assessee-company. As per the learned Authorised Representative, the assessee-company is not hit by any of the Explanations contained below Section 271(1)(c). He drew our attention to the documents placed in the paper book at page Nos. 209 to 215 indicating the resolution passed by the Government of Orissa, Industries Department dt. 19th Nov., 1984 offering construction of the industrial unit setting up (captive power plant including stand-by unit) for generating power for their own industrial requirement. The assessee-company sought permission from Orissa State Electricity Board (OSEB) under Section 44 of Electricity (Supply) Act, 1948, for installation of 1150 KVA DG Set in its factory at Belpahar vide permission letter dt. 10th April, 1987. Our attention was also drawn to the letter of intent bearing No. PJ/732/6, dt. 20th Aug., 1999, sent by the assessee-company to M/s Kanubhai Engineers Ltd. of Calcutta for the new DG set. This letter of intent was converted by the assessee-company on 17th Sept., 1988, into formal purchase order upon M/s Kanubhai Engineers Ltd. bearing No. TR/88/DIRPG/0155 for new DG set. The learned Authorised Representative has also drawn our attention to the copy of work programme and bar chart dt. 23rd Jan., 1990 for installation of the new DG set received from M/s Kanubhai Engineers Ltd. and commissioning thereof was proposed by them to be completed by 9th March, 1990. As per the learned Authorised Representative the new KWH metre for the DG set was sent by the assessee-company for testing to Dy. Testing Inspector, Government Testing Laboratory, Bhubaneswar on 20th March, 1990. He has also drawn our attention to the installation drawing for DG set sent by the assessee-company for approval to the Electrical Inspector, Government of Orissa, Angul, on 24th March, 1990. Our attention was also drawn to the test report of electrical metre for the new DG set received by the assessee-company from the Government of Orissa on 29th March, 1990. The learned Authorised Representative submitted that the installation drawing approved by the office of the Electrical Inspector, Government of Orissa, Angul, was received by the assessee-company dt. 30th March, 1990. Our attention was also drawn to the photocopy of the inventory register maintained by the assessee-company showing installation and commission of the new DG set on 30th March, 1990. Our attention was also drawn to the photocopy of the log book showing trial run of the DG set on 30th March, 1990. The learned Authorised Representative also invited the attention of the Bench towards certificate dt. 9th Sept., 1992 from M/s Kanubhai Engineers Ltd., Calcutta confirming erection of the DG set and commissioning thereof on 30th March, 1990. He also invited our attention to the relevant extracts of the fixed asset register maintained under the Indian Companies Act, 1956, in which the new DG set was shown as duly commissioned on 30th March, 1990. He further submitted that the first inspection report carried out on 21st April, 1990 also clearly shows that installation work of the new DG set was found by the Electrical Inspector to his satisfaction and in which the Inspector had only pointed out certain deficiencies in respect of "safety measures" which were required to be rectified by the assessee-company. He further submitted that in the remark column of this letter dt. 20th April, 1990, appearing at para 13, only talks about the first inspection before the newly installed DG set is allowed to be run commercially. As per the learned Authorised Representative, formal permission was required for the purpose of duty exemption to be submitted to the General Manager, District Industry Centre. This formal approval from OSEB permitting commercial use of the new DG set was taken on 8th Oct., 1990. He pointed out that this formal approval is not going to belie the trial run of the DG set on 30th and 31st March, 1990. No permission was required for trial running of the DG set, and as per learned Authorised Representative, the Electrical Inspector cannot carry out any inspection of the new DG set unless the same is fully installed and tested on trial run. As per the assessee's letter dt. 28th April, 1990, installation of the DG set and the accessories, installation of generator control panel and other ancillary panels, instruments and connections had already been carried out. The use of the words "other formalities" in the last sentence of the said letter referred to formal inspection of the new DG set and its accessories by the office of the Electrical Inspector. It is true that the words "trial run" have not been specifically mentioned in the said letter dt. 28th April, 1990, but completion of all the jobs listed in the said letter dt. 28th April, 1990 can have no meaning unless the installations are tested and trial runs thereof carried out. Giving reply to the learned Departmental Representative's arguments and written submissions, the learned Authorised Representative submitted that letter of OSEB dt. 19th May, 1987 has not been violated by the assessee-company. The last condition appearing in the said letter, the installation shall be energised only after written permission of Electrical Inspector, Orissa or his Authorised Representative relates to "commercial running" of the new DG set, as is clearly evident from the remarks column appearing in the first inspection report dt. 21st April, 1990 made by the Electrical Inspector as also from the second paragraph of the letter dt. 28th Oct., 1991 issued by the Chief Electrical Inspector, Orissa which clearly used the expression, the date of "energisation for commercial operation". It is nowhere stated in the conditions set out in the permission letter dt. 19th May, 1987 issued by OSEB that permission is required even for trial run of the DG set. As per the learned Authorised Representative no permission of OSEB was required for trial run of the DG set and no inspection of the DG set can at all be effectively carried out, unless the installation and trial run of the DG set is already carried out by the concerned user. The assessee-company complied with all the conditions specified in the permission letter dt. 10th April, 1987, before the said new DG set was allowed to be energised for commercial running on 8th Oct., 1990. In support of the definition of word "installation" reliance was placed on judgment of the Hon'ble Supreme Court in case of CIT v. Meer Mahmmad Ali (1964) 53 ITR 165 (SC). It was explained by the Hon'ble Supreme Court that the word "installation" would mean inducted or introduced, to place an apparatus in a position for service or use. The learned Authorised Representative submitted that the installation of the DG set cannot lawfully be equated with formal permission for commercial use thereof by any authority. He further submitted that finding recorded by the Tribunal in quantum appeal was contrary to the facts on record with regard to the use of generator before 28th Oct., 1991. In reply to the learned Departmental Representative's argument regarding non-application of Expln. 1(A) of Section 271(1)(c), the learned Authorised Representative submitted that Expln. 1(A) clearly requires the AO to prove the explanation given by the assessee to be false, in a case where the assessee concerned offers an explanation. Explanation 1(B) talks about the situation where the assessee offers an explanation, which he is not able to substantiate. In the instant case, the explanation offered by the assessee before the lower authorities is clearly substantiated by various documents filed not only before the lower authorities but also before the Bench. The explanation offered by the assessee is not found to be false by the AO and, therefore, it is not a case falling under and/or hit by Expln. 1(A) of Section 271(1)(c). He further submitted that the case laws relied on by the learned Departmental Representative in the case of K.P. Madhusudhanan (supra) and B.A. Balasubramaniam (supra) are fully distinguishable on facts. As per learned Authorised Representative there is no difference whatsoever between the Expln. 1 of Section 271(1)(c) now existing on the statute book as compared to the Expln. 1 enacted originally w.e.f. 1st April, 1976. What was earlier enacted w.e.f. 1st April, 1976 in the form of proviso under Expln. 1(B) is now merged with Expln. 1(B) itself by an amendment made w.e.f. 10th Sept., 1986 by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986.
24. The learned Authorised Representative further submitted that the jurisdictional High Court in case of CIT v. Indian Metal & Ferro Alloys Ltd. (supra) on almost identical facts had confirmed the deletion of penalty under Section 271(1)(c), Expln. 1. He further submitted that the learned Departmental Representative is not correct in stating that the law considered by the Hon'ble Orissa High Court was different insofar as what is contained in para B of Expln. 1 (as amended in the year 1986) was already part of the statute book in the form of the proviso appearing under Expln. 1 as inserted by the Amendment Act, 1975.
25. After citing various judgments including the judgment of jurisdictional High Court, the learned Authorised Representative submitted that instant decision of CIT(A) quashing the penalty levied by the AO does not require any interference. He, therefore, requested to dismiss the Departmental appeal in toto and to allow the cross-objection filed by the assessee-company.
26. We have considered the rival contentions carefully. We have also heard in detail the representatives of the Department and the assessee. We have also gone through minutely the detailed paper book filed by the assessee as well as notes on arguments given by the CIT (Departmental Representative) and also reply of the note of arguments given by both the parties. We have also deliberated and considered the judicial precedents cited at Bar by the learned Departmental Representative and Authorised Representative! We have also deliberated upon the applicable legal position to the factual matrix of the case under consideration. From the record we find that penalty under Section 271(1)(c) Expln. 1 was imposed by the AO in respect of assessee's claim for depreciation on DG set. Submission of the assessee before the AO was that the DG set was installed and trial run was carried out on 30th and 31st March, 1990. Necessary permission for installation of the new DG set was granted to the assessee by the OSEB vide their letter dt. 19th May, 1987. The metre was tested on 29th March, 1990 and installation drawing was, approved on 30th March, 1990. The AO was of the view that as per terms of permission letter for installation, of the DG set dt. 19th May, 1987, the DG set could be energised only after written; permission from the Chief Electrical Inspector, Orissa, which pre-supposes inspection of the installation of the DG set by the Chief Electrical Inspector or any other officer duly authorised by him before granting permission for energisation. As per the learned Departmental Representative even the first inspection was carried out on 21st April, 1990 and in the inspection report in remark column it was stated that installation work of DG set was found to be incomplete. The CIT (Departmental Representative) also stated that formal permission for commercial running of the DG set was given on 8th Oct., 1990. As per the learned Departmental Representative after' making all these observations the AO found that the assessee's claim for depreciation is not maintainable. He stated that the scheme of law as envisaged under Section 271(1)(c)(iii) with its Expln. 1 clearly enters into the facts and circumstances of the case. The AO therefore, levied penalty on account of wrongful claim of depreciation.
27. By the impugned order, the CIT(A) has recorded the finding that the generator has been installed and had been used in last two days of the accounting year and the claim of installation is supported by the permission of Government for installation, approval of drawing, erection of the generator, testing of metre, first inspection in April, 1990 before giving permission for energisation and running the generator pending receipt of permission from the Chief Electrical Inspector. The CIT(A) also observed that the assessee's claim that it has run the generator in the last two days of the year and the power has been fed to the system for use is also supported by internal reports, consumption of fuel recorded in the log book, note of the technical persons and audit report. The CIT(A) has also observed that the appellant-company had also informed the Electrical Inspector that due to severe power restriction imposed by OSEB it has become essential to run the generator set, pending obtaining of formal approval. All these explanations and supporting evidences were not found to be false by the AO. The CIT(A) further observed that the appellant-company never stated before the AO that final clearance has been given during the year. The assessee has also stated before the AO that it has used the generator even without permission and this has been duly informed to the Chief Electrical Inspector. The CIT(A) found that these facts are neither incorrect nor bogus. The CIT(A) also found that the AO has declined the claim of depreciation on the ground that condition of putting to use has not been satisfied because of want of statutory permission. Nowhere the claim of use of generator in last two days has been disputed. The disallowance of depredation has been upheld by the appellate authorities on the ground that statutory permission for energisation was not given during the year. The CIT(A) also observed that the generator has been procured basically as a standby machine to supply power when there is no power from the main system. The generator may not be used for the whole year; even then the depreciation will be allowable for its passive use. Even though the claim of depreciation has not been ultimately allowed and was allowed in the next year, yet the claim made by the appellant under these circumstances were a bona fide one. The appellant-company has not failed to offer an explanation and the explanation offered was also not found to be false. The CIT(A) also observed that the appellant has also been able to prove that the explanation offered is bona fide and all the facts relating to computation of its total income have been disclosed at the time of assessment proceedings and penalty proceedings. Hence, the appellant is not covered under Expln. 1 to Section 271(1)(c). In view of the judgment of the jurisdictional High Court in case of Indian Metal & Ferro Alloys Ltd. (supra), the CIT(A) stated that it is not necessary to look for decisions of other High Courts. The CIT(A) observed that from facts and circumstances in case of Indian Metal &Ferro Alloys Ltd. (supra) and the facts of the appellant's case, it can be said that the appellant is not guilty of concealing the particulars of income or furnishing of inaccurate particulars of such income. The AO is, therefore, not justified to levy concealment penalty. He, therefore, is directed to delete the penalty.
28. In view of the above factual position, following issues fall for our consideration :
(I) Whether observations made by the Tribunal in the quantum appeal is binding while deciding the appeal under penalty proceedings of the Tribunal and while hearing the penalty appeal is competent in law to have a fresh look on the entire facts and circumstances ?
(II) Whether, on the facts and circumstances and in view of documents placed on record by the assessee the DG set can be said to have been installed and trial run carried out on 30th March, 1990 and 31st March, 1990 ?
(III) Whether trial run of DG set amounts to putting to use for the purpose of substantiating bona fide of assessee's claim of depreciation so as to take the assessee outside the purview of Expln. 1(B) below Section 271(1)(c) ?
(IV) Whether the formal permission for commissioning operation issued by the OSEB on 8th Oct., 1990, belie the bona fide of assessee's explanation regarding trial run of DG set on 30th and 31st March, 1990 ?
29. After carefully going through various documents filed before the AO and which is also placed on the paper book, we find that the assessee-company after obtaining permission .from OSEB vide their letter dt. 19th May, 1987, had placed the letter of intent and the purchase order for purchase of German manufactured new DG set upon M/s Kanubhai Engineers Ltd., Calcutta. The responsibility for entire installation, erection and commissioning of new DG set was on M/s Kanubhai Engineers Ltd., Calcutta (hereinafter referred to as KE). As per assessee's letter dt. 24th March, 1990 the scope of work of KE was set out in the bar chart. The Electrical Inspector of OSEB had also approved the installation drawings on 30th March, 1990. Office of Chief Electrical Inspector tested the electricity metre for the new DG set on 29th March, 1990. For running the DG set the assessee had obtained high speed diesel oil on 28th March, 1990. As per the fixed asset register maintained under Indian Companies Act, 1956, the new DG set was duly shown as commissioned on 30th March, 1990. The log sheet of the DG set on 30th March, 1990 and 31st March, 1990 clearly indicated its trial run. The handing over report in respect of the new DG set was duly signed on 30th March, 1990 and handed over to KE. In turn KE also confirmed in writing that the new DG set was duly erected and commissioned by them on 30th March, 1990.
30. All the above documents submitted before the lower authorities clearly demonstrate the bona fide of assessee's claim regarding trial run of the DG set on 30th March, 1990. There is no dispute to the fact that formal approval for commercial running of the DG set was given by the Electrical Inspector, Orissa on 8th Oct., 1990. As per the terms of letter dt. 19th May, 1987 issued by the OSEB, the installation was to be energised only after written permission of Electrical Inspector related to "commercial running" of the new DG set which is also evident from remark column of the first inspection report dt. 21st April, 1990 made by the Electrical Inspector and also evident from second paragraph of the letter dt. 28th Oct., 1991 issued by the Chief Electrical Inspector, Orissa, which clearly used the expression "date of energisation for commercial operation". No condition was stipulated in the letter dt. 19th May, 1987 issued by OSEB that permission was even required for trial run of the DG set. We, therefore, are in agreement with the learned Authorised Representative that no permission of OSEB was ever required for trial run of the DG set. We also find force in the argument of the learned Authorised Representative to the effect that no inspection by OSEB can at all be effectively carried out, unless the installation and trial run of the DG, set is already carried out by the concern user. The formal permission was required by the assessee for making application to District Industries Centre, Government of Orissa for grant of exemption in respect of units generated from the new DG set w.e.f. 8th Oct., 1990. Such formal permission is not a hindrance for the trial run of the DG set prior to it. By filing the documentary evidence, the assessee-company has clearly demonstrated before the lower authorities that erection and commissioning of the new DG set was the responsibility of KE which fact is evident from the letter of intent dt. 28th Aug., 1988 converted to purchase order dt. 17th Sept., 1988 issued by the assessee-company to KE. The assessee has also paid an aggregate sum of Rs. 1,33,000 against bill of Rs. 1,64,099.58. The details of the payment by account payee cheques were also furnished before the lower authorities along with certificate issued by the Central Bank of India confirming the clearance of impugned cheques through the 'clearing house of Canara Bank on behalf of KE. Even though the entire erection and commissioning of the DG set was assigned to KE, however, a part of electrical instruments had also been supplied by M/s Kanubhai Switch Gears (P) Ltd., a sister-concern of KE. There was some typographical error in putting the name of Kanubhai Switch Gears (P) Ltd. against the heading "erection and commissioning charges" in the statement referred to by the learned CIT (Departmental Representative). However, such typographical mistakes do not amount to falsity in assessee's claim that erection and commissioning of DG set was done by KE, as originally alleged by the learned CIT (Departmental Representative). We also find that a certificate, issued by KE regarding installation and erection, was filed before the AO in the course of penalty proceedings as well as before the CIT(A) in course of hearing of the appeal against the impugned penalty order. Non-filing of such certificate before the AO while making the assessment under Section 143(3), does not debar the assessee to file the same in course of penalty proceedings before the AO and appellate proceedings in respect of penalty levied before the CIT(A).
31. Even after submitting such certificate for installation, erection and trial run, the AO has neither examined M/s KE nor found the certificate filed by the assessee to be false. The assessee can be said to have discharged its primary onus by furnishing explanation with regard to the claim and substantiating the same by documentary evidence. In the instant case, the assessee had offered the explanation regarding its claim of depreciation and has been able to substantiate the same by filing documentary evidence and has also been able to prove the bona fide of the explanation by bringing sufficient material on record.
32. In view of the above, we can conclude that the initial burden is upon the assessee to prove the bona fide of his explanation. It is also the obligation of the assessee to disclose all the facts relating to its claim, which are material to the computation of its total income. In the instant case, this initial onus has been clearly discharged by the assessee-company by pursuing various documents, which clearly establishes that the trial run was carried out even without formal approval for making commercial use of the DG set by OSEB.
33. Now we examine the legal position as to whether the assessee has been able to escape from the Explanation contained below Section 271(1)(c)(iii). Explanation 1(A) clearly requires the AO to prove the explanation given by the assessee to be false, in case whether the assessee concerned offers explanation. Explanation 1(B) talks about the situation, where the assessee offers explanation, which he is not able to substantiate. In the instant case, the explanation offered by the assessee-company before the AO clearly substantiated by various documents, and the explanation has not been found to be false by the AO. Thus, we find that this is not a case falling under Expln. 1(A) to Section 271(1)(c). We also find that the assessee has also not fallen under Expln. 1(B) to Section 271(1)(c), insofar as Expln. 1(B) requires the assessee to substantiate its explanation with evidence to prove the bona fide thereof and also to disclose all the relevant facts in relation thereto.
34. Let us now examine the case laws cited by the learned Departmental Representative in the case of K.P. Madhusudhanan (supra). In this case, the penalty was cancelled by the Tribunal, on the ground that in the notice initiating penalty proceedings, the assessee was not intimated about the proposed action under Expln. 1(B). Under these circumstances, the Hon'ble Supreme Court observed that Explanation to Section 271(1)(c) is a part of Section 271 and when the ITO or the AO issues a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation, by reasons of the Explanation, where the total income returned by the assessee is less than 80 per cent of the total assessed under Section 143(3) or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnishes inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee, is, therefore, by virtue of notice under Section 271, put to notice that if he does not prove, the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of income thereof and consequently be liable to penalty provided by that section. No expressed invocation of the Explanation to Section 271 in the notice issued under Section 271 is necessary before the provisions of Explanation therein are applied. Thus, the decision in case of Madhusudhanan (supra) has no application in the instant case, where the Explanation has been clearly invoked and the assessee has been able to substantiate the bona fide of such Explanation and which has not been found to be false by the AO. Even, on merits, the facts in Madhusudhanan's case (supra) are entirely different insofar as the assessee-firm had taken bank draft for payment to the suppliers, but no entry was made in the books of account on the dates on which the loans were obtained for making these drafts. The assessee was also unable to furnish evidence for such loans and, therefore, he offered amount of draft/loan as its additional income. Thus, it is clearly a case of an explanation furnished by the assessee, which he was not able to substantiate. It was in these circumstances that Expln. 1(B) to Section 271(1)(c) was held to be rightly invoked and levy of penalty was confirmed. In the instance case, we find that the assessee-company has been able to substantiate its explanation through various documentary evidences filed before the AO which has not been found to be false by him.
35. The CIT (Departmental Representative) has also relied on judgment of B.A Balasubramaniam (supra). In this case, the Hon'ble Supreme Court has considered the impact of the Explanation inserted through amendment made w.e.f. 1st April, 1964. In this case, the High Court has come to the conclusion that as the difference between the income assessed and the income returned was more than 20 per cent, the Explanation was applicable and, therefore, the AO was justified in imposing the penalty because the assessee had not been able to discharge his onus which lay on it under the said Explanation in the light of interpretation of the said Explanation as given in CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC). However, in the instant case, we find that the assessee-company had discharged its initial onus by furnishing its bona fide Explanation and also documentary evidence to support its explanation. Thus, the ratio of B.A. Balasubramaniam's case (supra) is not applicable to the facts and circumstances of the instant case.
36. Penalty proceedings are distinct and different from assessment proceedings. Findings in the assessment proceedings are not conclusive. The entire material available should be considered afresh by the authorities before imposing penalty under Section 271(1)(c). The Explanation to Section 271(1)(c) provides a rule of evidence raising a rebuttable presumption in certain circumstances. No substantive right is created or annulled thereby. The substantive law relating to levy of the penalty is preserved. The initial burden of proof is cast on the assessee to establish the presumption arising in certain cases. The assessee can discharge the onus either by direct evidence or circumstantial evidence or by both. The cumulative effect of all facts should be taken into consideration. The assessee is entitled to show and establish by the material and relevant facts, which may go to affect his liability for the quantum of penalty. Where there is a concealment to make the penalty exercisable is normally a question of fact. Where the burden of proof in a given case has been discharged on a set of facts is also a question of fact. The burden is cast on the assessee to offer a bona fide explanation. This can be discharged either by independent evidence laid during the penalty proceedings or by a closer scrutiny or appraisal of the existing facts and data available. The rebuttal of presumption must be on materials relevant and cogent. It is for the fact-finding body, to judge, the relevancy and sufficiency of the materials, if on the basis of materials on record, the authority reaches to the conclusion that the assessee has discharged the onus, it becomes a conclusion of facts. In the instant case, on the basis of the materials available on record, we can safely reach to the conclusion that to substantiate its claim, the assessee had furnished bona fide explanation and which were duly supported by the documentary evidence. The assessee has also disclosed all the facts relating to the basis for making of claim of depreciation and which we found to be bona fide.
37. In the scheme of the IT Act, the proceedings for imposition of penalty, though emanating from the proceedings of assessment, are essentially independent and a separate aspect of the proceedings. The findings given in the assessment proceedings are certainly relevant and have the probative value, but such findings are material alone and may not justify the imposition of penalty in a given case, because the considerations that arise in penalty proceedings are different from those that arise in assessment proceedings. There are plethora of judgments in support of the proposition that penalty need not necessarily be levied even when quantum appeal is decided against the assessee. The Hon'ble Gujarat High Court in the case of National Textile Ltd. v. CIT (2001) 249 ITR 125 (Guj) observed that Explanation to Section 271(1)(c) does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income with the hypothesis that it does. It was also observed that if the assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference with the assessee's case fails, the explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee. Where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. It was also observed that the explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department cannot be equated with fraud or wilful default.
38. There are also plethora of judgments to the effect that findings recorded or conclusion drawn in deciding the quantum appeal, are neither conclusive nor binding. For this proposition reliance may be placed on the judgment of Hon'ble Kerala High Court in the case of CIT v. Pawan Kumar Dalmia (1987) 168 ITR 1 (Ker) and the judgment of the Hon'ble Allahabad High Court in the case of Banarash Texturium v. CIT (1988) 169 ITR 782 (All), and also the judgment of the Hon'ble Delhi High Court in the case of CIT v. Chetandas Lachmandas (1995) 214 ITR 726 (Del).
39. In the case of CIT v. Indian Metal & Ferro Alloys Ltd. (supra), the jurisdictional High Court observed that where the assessee claimed depreciation and development rebate for the year of installation relying on the decision in the case of CIT v. Vayithri Plantations Ltd. (1981) 128 ITR 675 (Mad), Whittle Enderson Ltd. v. CIT (1971) 79 ITR 613 (Bom) and the decision of the Tribunal, when any claim was made with reference to the several decisions of the Hon'ble High Courts and the view of the Tribunal, it could be said that the claim was made bona fide. Under these circumstances, the order of the Tribunal deleting the penalty was confirmed by observing that the Tribunal had recorded positive findings that the claim was bona fide and there was no concealment or furnishing of inaccurate particulars,
40. In view of the above discussions, we can conclude that the assessee-company had proved its bona fide and has also placed before the AO and its authorities below the material facts relating to the installation, trial run and commissioning of the said new DG set. The explanation furnished by the assessee-company has not been found to be false by the AO, nor any defects whatsoever have been pointed out by the AO in any of the materials and/or documents filed by the assessee-company before him. The findings recorded by the CIT(A) is to the effect that the appellant has not failed to offer an explanation. The explanation offered is also not found to be false. The appellant has also been able to prove that the explanation offered is bona fide and all the material facts relating to the computation of its total income have been disclosed at the time of assessment proceedings and penalty proceedings. Hence, the appellant is not covered under Expln. 1 to Section 271(1)(c) of the Act for which penalty is not sustainable. The findings recorded by the CIT(A) are as per materials on record. As per our considered view, trial run of DG set is sufficient to substantiate the bona fides of assessee's claim, so as to take the assessee outside the purview of Expln. 1. Thus, even though formal permission to commercially run the DG set was required for the purpose of claiming power generation subsidy from the State Government, was received later on, is not going to restrict the assessee to have a trial run of its generator. On the basis of materials on record neither Expln. 1(A) nor 1(B) below Section 271(1)(c), is attracted in assessee's case. We, therefore, do not find any reason to interfere in the order of the CIT(A). CO No. 71/Ctk/2002 (In ITA No. 448/Ctk/2002)
41. The cross-objection filed by the assessee has already been dealt with while disposing the Revenue's appeal. As the Revenue's appeal has already been dismissed, we do not find it necessary to deal with the cross-objection separately.
42. In the result, both the Revenue's appeal and the cross-objection filed by the assessee are dismissed.