Income Tax Appellate Tribunal - Cochin
Colour House vs Assistant Commissioner Of Income-Tax on 21 October, 1994
Equivalent citations: [1995]53ITD245(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee against the levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. The circumstances leading to the levy of penalty may be traced to the assessment order dated 29-1-1988 wherein the learned Assessing Officer disallowed the claim of the assessee for depreciation on one Q.S.S. Machine in the following terms:-
Depreciation on new addition : A.S.S. Machine :
Value Rs.9,92,050. The assessee has imported this new machine from Japan. The total cost according to the assessee comes to Rs. 9,92,050. On a verification of the case records connected with this purchase, the machinery in question reached Cochin Harbour on 27-3-1986. The machinery was cleared by the Canara Bank, Trichur. There were some differences with the Customs Department towards customs duty payable and the matter was finally settled on payment of Rs. 6,21,000 towards duty and the same has been debited to a/c. on 28-4-1986 vide P.11 of the Day Book. The machinery was brought by the vehicle owned by the India Photo House, Chembottil Lane, Trichur and reached Trichur on 7th May, 1986. This has been installed in the Colour House by Japan personnel, wherefrom the machineries were imported. The freight expenditure of Rs. 2,171 has been debited to accounts only on 21-6-1986. The clearing agents are M/s. Jai Narayan Trades and their bill dated 12-6-1986 for freight expenses has been produced by the assessee. Since the assessee is following the cash system of accounting, the depreciation in respect of Q.S.S. Machine claimed to the extent of Rs. 2,41,042 cannot be allowed in this assessment. Therefore, the claim is disallowed.
In the assessment certain credits were added to the income of the firm under Section 68 of the Income-tax Act. In the appeal, the credits were accepted as genuine and were excluded from the income of the assessee. As far as the disallowance of depreciation of Rs. 2,41,042 was concerned, the assessee had pleaded before the first appellate authority that the impugned amount included depreciation on the old machinery also and accepting the contention of the assessee, the learned CIT (Appeals) directed the Assessing Officer to exclude the disallowance of depreciation in respect of old machinery. In the course of the assessment proceedings, action under Section 271(1)(c) was initiated. The assessee's explanation was that it was only due to bona fide mistake on the part of the assessee that the claim for depreciation on the Q.S.S. Machine was made. Such a mistake arose mainly on account of the fact that the assessee had debited its accounts for the purchase of the machinery and the accountant was under the wrong presumption that once the account is debited, the assessee was entitled to depreciation allowance. The learned Assessing Officer rejected this explanation of the assessee for the reason that it is an elementary principle that depreciation is an allowance towards wear and tear of a machinery and unless it is put to use, there cannot be any wear and tear. That the assessee committed a bonajide mistake in this respect is too incredible a claim to be accepted.
Thus, he levied penalty not only in respect of the amount of depreciation disallowed but also in respect of the additions made to the income under Section 68 of the Income-tax Act, 1961. The assessee carried the matter in appeal. The learned CIT(Appeals) upheld the levy of penalty but directed the Assessing Officer to modify the quantum of penalty having regard to the reliefs granted in the quantum appeal. Accordingly, the learned Assessing Officer reduced the amount of penalty from Rs. 1,50,000 to Rs. 1,00,000 by his order dated 29-3-1990 after excluding the cash credit additions and also the amount of depreciation in respect of the old machinery. Thus., ultimately penalty has been leviedin respect of the claim for depreciation on the new machinery purchased from Japan. The assessee is in second appeal.
3. Sri K.A. Chandrasekhara Menon, the learned representative of the assessee, pleaded that the case was handled by a young Chartered Accountant and the claim was made on the basis of the entry as respects purchase cost of the machinery which was on 27-3-1986. It was only later that the assessee came to know that the claim was an erroneous one and upon realising the mistake it did not pursue the matter further in appeal in so far as the claim for depreciation in respect of the new machinery was concerned. Thus, this is a case of bona fide mistake based on the cash system of accounting and mistaken impression of law. The income of the assessee ultimately assessed is only Rs. 11,400 resulting in a tax demand of Rs. 65 and in the context of such a marginal income it cannot be said that the assessee had claimed the depreciation with a view to gain undue tax advantage.
4. Sri P. Balakrishnan, the learned departmental representative submitted that ignorance of law is no excuse and by claiming depreciation to which the assessee is not entitled, the assessee was attempting to get tax advantage because in case the claim was allowed, it would be entitled to carry forward the unabsorbed depreciation to the succeeding year to set it off against the income of the succeeding year. Thus, even if tax advantage was not gained this year, the assessee could have gained tax advantage in the succeeding year. Therefore, it cannot be said that the assessee has acted bonafidely. The penalty was rightly levied.
5. Having regard to rival submissions, we cancel the levy of penalty. It is not in dispute that the assessee was adopting cash system of accounting. It is also not in dispute that the entry for the purchase of the machinery was made in the accounts of the assessee on 27-3-1986 when the purchase cost of the machinery was cleared through Canara Bank, Trichur. Thus, the asset account stood debited in the previous year relevant to the assessment year 1986-87. It is submitted before us that the assessee was initially represented by a young Chartered Accountant. In view of the cash system of accounting and in view of the factum of payment of purchase cost of the machinery, the accountant claimed depreciation by mistake and such mistake was a, bona fide one. It is this explanation that was not accepted by the Assessing Officer for the reason that Section 32 is very clear on the question. The learned departmental representative also vehemently contended that ignorance of law is no excuse. True. But in a country where the citizens have not been thoroughly educated on tax laws, bona fide mistake or mistaken view of law should be pitted against the maxim ignorantia legis neminem excused. The fact that the assessee in its quantum appeal has confined itself only to disallowance of depreciation in respect of the old machinery showed that upon being appraised of the correct legal position in regard to grant of depreciation, the assessee had realised the mistake and was content with the disallowance. The income of the assessee for the impugned assessment year is only marginally above non-taxable limit as finally determined resulting in a tax demand of Rs. 65 and the income in the succeeding years, viz., 1987-88 and 1988-89 have resulted in loss as per details furnished by the revenue. In the circumstances, it cannot be said that the assessee has acted with a motive to gain undue tax advantage either in this year or even in the succeeding years in the guise of carry forward of unabsorbed depreciation. May be the assessee has acted negligently when it claimed depreciation on machinery not installed. An act done in good faith is one when it is done honestly though negligently. Therefore, in the facts and circumstances of the case, we hold that mens rea cannot be attributed to the assessee though its claim in respect of depreciation on the uninstalled new machinery was untenable in law. Thus, we cancel the levy of penalty.
7. The appeal is allowed.